Transcript 2010 LCD Issuer Review and Outlook

2010 LCD Issuer Review and Outlook
Standard & Poor’s LCD
Mike Audino (212) 438-1865, [email protected]
Peter DeLuca (212) 438-1739, [email protected]
January 21, 2010
1
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
2010 Issuer Review and Outlook
LCD provides issuer specific credit research and historical financials on
over 35 leveraged companies across several industries. Many of these
companies are widely held by leveraged loan and high yield investors
and encompass distressed as well as performing credits.
The following report will present a summary of each company’s key
information such as recent historical financials and credit statistics,
company description, and strengths and weaknesses as well as
provide additional commentary as to what happened in 2009 and what
investors should look for in 2010. For additional details, including
enterprise valuation/recovery prospects for many of these credits,
please refer to the issuer reports and issuer financials pages of our
website lcdcomps.com.
Please see the following page for an index of industries and companies
that will be discussed in this report
2
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
2010 Issuer Review and Outlook:
Companies Covered
Chemicals Summary
Georgia Gulf
Hexion
Momentive Performance Materials
Solutia
Page
4
5
6
7
8
Distressed Summary:
Accuride
Citadel Broadcasting
FairPoint
Six Flags
9
10
11
12
13
Healthcare Summary:
Iasis Healthcare
LifeCare
Rotech Healthcare
Sun Healthcare Group
Vanguard Health Systems
14
15
16
17
18
19
Media: General Summary
Cengage Learning
Valassis Communications
20
21
22
Media: TV/Radio/Newspapers: Summary
Cumulus Media
Emmis Communications
Gatehouse
Gray TV
23
24
25
26
27
Paper/Packaging
Appleton
Exopack
Solo Cup
Verso
Xerium
Page
28
29
30
31
32
33
Retailers/Distributors
Burlington Coat Factory
Claire’s Stores
Keystone Automotive
Michaels Stores
Neiman Marcus
Rite-Aid
34
35
36
37
38
39
40
Other
Alion Science and Technology
Atlantic Broadband
Dana
Knology
Mediacom
Ply Gem
Venoco
41
42
43
44
45
46
47
48
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Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Chemicals
Chemical manufacturers entered 2009 with highly leveraged balance sheets and faced
weak demand from worsening global economic conditions. Most sector participants
bounced off the first and second quarter lows with sequentially increasing revenue and
EBITDA through the quarter ended September 30, 2009 driven by increasing volume
from improving global economic conditions.
For 2010, the worst may be in the past. Economic conditions are better, demand is
improving as destocking is over, companies are selectively raising prices, and credit
markets are open. With the restructuring initiatives largely completed, companies can
look towards the future with more confidence compared to that of January 2009.
Companies discussed include:
• Georgia Gulf Corp.
• Hexion Specialty Chemicals, Inc.
• Momentive Performance Materials, Inc.
• Solutia, Inc.
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Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Georgia Gulf
Free cash
flow
Operating performance
EBITDA capex /
interest
Leverage
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
EBITDA
EBITDA
margin
LTM 12/31/08
2,916,477
6.8%
150,118
5.1%
0.65
(29,532)
476,112
1,505,150
3.17
10.03
232,875
32%
27.5
49.2
23.1
19,974
24,500
LTM 3/31/09
2,611,348
7.1%
147,025
5.6%
0.65
(28,683)
603,047
1,518,000
4.10
10.32
175,871
32%
28.6
52.4
22.7
5,640
10,900
LTM 6/30/09
LTM 9/30/09
2,285,848
8.2%
130,204
5.7%
0.56
(110,598)
591,300
1,431,818
4.54
11.00
112,000
35%
26.4
42.7
18.4
53,871
59,400
2,023,626 10.4%
141,220
7.0%
0.68
54,138
319,614
501,927
2.26
3.55
168,839
102%
27.4
42.7
20.2
61,735
59,974
FCF
Senior debt
Total debt
Senior debt Total debt to
to EBITDA
EBITDA
Quarterly EBITDA
Georgia Gulf is a manufacturer of chemicals and vinyl based building and home improvement products. The Company was formed in October 2006 when
Georgia Gulf, a manufacturer of chemicals, acquired Royal Group Technologies, a manufacturer of building products, to vertically integrate and to take
advantage of the favorable market conditions that existed at the time in the building products industry. However, shortly after the transaction closed, the US
housing industry began to decline and along with it, the Company’s Sales and EBITDA. EBITDA for the LTM period ended September 30, 2009 was $141
million compared to approximately $350 million of pro-forma LTM EBITDA at June 2006.
Strengths
• Good market share in certain segments but large competitors
• Diversity of end markets in the chemicals division
• Value-added products in the building materials segment
• Free cash flow exited negative territory during the quarter ended September 2009
• Recently completed debt for equity exchange significantly reduced leverage and interest expense
Weaknesses
• Cyclicality/Significant exposure to the US housing industry
• Raw material price sensitivity – oil, oil based chemicals and natural gas
• Commodity products in the chemicals division
Summary
The Company faces many challenges in the quarters ahead as it attempts to navigate through a difficult operating environment. Until the housing and
construction markets recover, investors should expect disappointing results that include weak EBITDA, and lackluster cashflow.
5
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Hexion Specialty Chemicals
Free cash
flow
Operating performance
Other
LCD EBITDA
LTM 12/31/08
6,093,000 13.6%
343,000
5.6%
0.69
(768,000)
3,236,000
4,084,000
9.43
11.91
163,000
30%
54.4
47.3
46.1
37,000
46,000
LTM 3/31/09
5,371,000 13.1%
235,000
4.4%
0.33
(642,000)
2,874,000
3,796,000
12.23
16.15
328,000
28%
51.0
48.6
44.1
26,000
61,000
LTM 6/30/09
LTM 9/30/09
4,650,000 13.8%
4,119,000 15.3%
144,000
200,000
3.1%
4.9%
0.01
0.25
(540,000)
(420,000)
2,875,000
2,895,000
3,555,000
3,507,000
19.97
14.48
24.69
17.54
351,000
357,000
29%
31%
43.8
40.0
41.1
36.4
47.5
47.3
23,000
114,000
90,000
128,000
Sales
GPM
EBITDA
FCF
Senior debt
Total debt
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
Company
adjusted
EBITDA
EBITDA
margin
EBITDA capex /
interest
Leverage
A/R
days
Inv.
days
A/P
days
Hexion Specialty Chemicals, Inc., is among the global leaders in the manufacture and distribution of thermosetting resins (thermosets). Thermosets are a
critical ingredient in all paints, coatings, glues, and adhesives used in consumer and industrial applications. The Company has 94 production facilities
throughout the world serving more than 8,300 clients in more than 100 countries (2008). The Company was formed during 2005 upon the merger of Borden
Chemical, Inc., Resolution Performance Products LLC, Resolution Specialty Materials LLC, and Bakelite AG (previously acquired by Borden). The Company is
owned by an affiliate of Apollo Management, L.P.
Strengths∙
• Global leadership in the manufacture of thermosetting resins
• Product use is diverse and resin is a critical ingredient in the performance of end products. Company has raised prices throughout 2009
• Diverse base of established clients in more than 100 countries with no single client representing more than 3% of annual revenue
• Strategically placed production facilities provide both scale and participation in all growing economies
• Apollo Management, L.P. continues to provide financial support to the Company
Weaknesses∙
• Senior and total leverage is excessive due to deteriorating EBITDA and acquisition related debt obligations
• End markets served are cyclically weak and not expected to significantly strengthen during the coming quarters
• Availability of credit for the Company and its clients could limit participation in any recovery. The revolving loan commitment matures on May 31, 2011
• The Company is subject to numerous environmental regulations at the domestic federal, state, and local levels as well as foreign laws and regulations
• Pension and post employment benefit obligations are extensive
Summary:
With global markets firming, the ability for Apollo to cure defaults, the essential nature of the Company’s products in numerous applications, no debt maturing
until May 2011, and continued low interest rates, Hexion appears to have the wherewithal to survive and participate in the long awaited growth in the global
economies.
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Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Momentive Performance Materials
Free cash
flow
Operating performance
Sales
GPM
EBITDA
EBITDA EBITDA capex /
margin
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt
to EBITDA
Total debt to
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Quarterly EBITDA
A/R
A/P
days Inv. days days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
2,639,254 30.4%
258,373
9.8%
0.42
(62,454)
1,334,400
3,239,836
5.16
12.54
466,142
30%
77.4
85.2
72.9
(16,648)
67,900
LTM 3/31/09
2,400,701 28.5%
147,138
6.1%
0.12
(106,423)
1,403,400
3,292,822
9.54
22.38
411,697
27%
81.5
104.8
78.0
(13,170)
14,900
LTM 6/30/09
LTM 9/30/2009
2,153,245 28.7%
2,021,782 28.5%
101,149
110,978
4.7%
5.5%
0.09
0.18
(102,850)
(51,417)
1,513,300
1,338,700
3,173,645
3,220,610
14.96
12.06
31.38
29.02
339,302
418,346
29%
29%
67.6
63.9
95.1
84.1
62.6
63.2
50,264
90,532
63,600
93,500
Momentive Performance Materials, Inc. is one of the largest producers of silicone and silicone derivatives in the world, and a leading manufacturer of products
derived from quartz and specialty ceramics. The Company’s products are a small but critical ingredient in end products manufactured by its clients. Silicone is
an additive that enhances the performance characteristics of a wide array of products to increase resistance (to heat, ultraviolet light, and chemicals),
lubrication, adhesion, and viscosity. A small product sample follows: shower caulk, pressure sensitive labels, foam products, cosmetics, and tires. Quartz and
specialty ceramics are utilized in the manufacture of highly engineered products, such as semiconductors and lenses. The Company’s manufacturing base
includes 25 facilities located throughout the world. Clients include Proctor & Gamble, 3M, Goodyear, Unilever, Motorola, L’Oreal, and BASF. The Company
was formed during December 2006 upon the sale of GE Advanced Materials by GE to Apollo Management, L.P.
Strengths
• Global leadership in the silicone industry
• Company’s products are a critical production input that enhances the performance of end products
• Diverse base of established clients with no single client representing more than 6% of annual revenue
• Good liquidity with no debt maturing until 2011
Weaknesses
• Senior and total leverage is excessive due to deteriorating EBITDA
• End markets are cyclically weak and not expected to strengthen significantly in the coming quarters
• Capital intensive business whose capital outlays may not be indefinitely deferred
Summary:
Revenue snapped briskly upward during the third quarter as inventory destocking ebbed in end markets served. Liquidity is strong as solid operating expense
management, lower inventory investment, and muted capital outlays drove cash balances to $404 million at September 2009. Despite the good performance
during the quarter, the Company remains highly leveraged, and interest coverage is weak. The Company needs a benign interest rate environment,
sustainable end market growth, and improving operating performance during the coming quarters so that leverage and interest burden continues to ease.
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Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Solutia
Free cash
flow
Operating performance
Other
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Quarterly EBITDA
Sales
GPM
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
3,096,000
18.1%
231,000
7.5%
0.84
(492,000)
1,371,000
1,396,000
5.94
6.04
225,000
64%
55.6
97.4
55.2
24,000
72,000
LTM 3/31/09
2,450,000
21.3%
221,000
9.0%
0.91
66,000
1,322,000
1,349,000
5.98
6.10
163,000
64%
55.9
125.7
55.8
52,000
56,000
LTM 6/30/09
LTM 9/30/09
1,765,000
1,626,000
29.7%
32.3%
252,000
270,000
14.3%
16.6%
1.49
1.64
144,000
168,000
1,182,000
867,000
1,191,000
1,198,100
4.69
3.21
4.73
4.44
211,000
298,000
64%
64%
46.8
50.2
102.0
87.9
43.8
43.4
92,000
102,000
96,000
119,000
EBITDA
EBITDA EBITDA capex /
margin
interest
Leverage
FCF
Senior debt
Total debt
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
A/R
A/P
days Inv. days days
Solutia, Inc. is a manufacturer of high performance chemical and engineered materials used in a broad array of consumer and industrial applications.
Operating activities are grouped among the Saflex, CPFilms, and Technical Specialties segments. Approximately 74% of 2008 revenue is from overseas
markets. Saflex (39% of 2008 revenue) is the world’s largest manufacturer of PVB (Polyvinyl Butyral) sheet, a plastic interlayer used in the manufacture of
laminated glass for automobile and architectural glass. The CPFilms segment (11% of 2008 revenue) manufactures films for color filters, computer touch
screens, and flat panel monitors. The Technical Specialties unit (50% of 2008 revenue) manufactures products for sale to the rubber industry, heat transfer
fluids, and aviation hydraulic fluids. The Company is the largest supplier of insoluble sulfur products, a key vulcanizing agent for the global tire industry.
Strengths
• Leadership positions in insoluble sulfur used in production of tires and PVB used in the global safety glass industry
• Adjusted LTM EBITDA at September 2009 approached $343 million, representing 21.1% of LTM revenue, and the Company recently increased full
year 2009 guidance of $350 million to $365 million
• Access to capital markets. In addition to the recent notes offering, the Company completed during June 2009, a secondary offering of common stock raised
net proceeds of $119 million. Proceeds repaid unsecured notes of $74 million
• Proforma for the $400 million note issuance, senior and total leverage was 2.5x and 3.5x, respectively at September 2009
• Proforma for the $400 million note issuance, liquidity at September 2009 was $298 million
Weaknesses
• Primary markets are cyclically weak. Approximately 70% of total revenue is from the global automotive and construction industries
• Revenue of $448 million for the quarter ended September 2009 was 23% lower the quarter ended December 2008 from lower volume across all businesses
due to continuing weakness in the global automotive, construction, and industrial sectors
• Revenue for the LTM period ended September 2009 declined $1.5 billion, or 48%, to $1.6 billion from $3.1 billion at December 2008 from lower sales
volume, divested businesses, and unfavorable exchange rates
• Legacy post retirement and environmental liabilities
Summary:
With the transformation to a specialty chemical business model (with corresponding higher margins) nearing completion, the Company performed well during
the quarter ended September 2009. The uncertainty related to legacy obligations continues and global end markets continue to be weak. That said, debt
obligations were realigned, EBITDA margins widened from improved gross margin, and capital outlays were held near the maintenance level. Despite heading
into the seasonally weak fourth quarter, the Company has cash balances of $184 million.
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
8
Distressed/Bankruptcy
2009 was clearly a difficult year for many firms for a variety of reasons. The
key factors include the weak economy, too much leverage, secular changes to
its industry, and poor timing and execution of acquisitions. That said, however,
all of these companies are on a path towards a restructuring which should allow
them to move forward in 2010 and beyond. Some face more challenges then
others but an improving economy should at least help them stabilize their
revenue in the near term. The following summaries address each company’s
strengths and weaknesses assuming a restructuring.
Companies discussed include:
• Accuride
• Citadel Broadcasting
• FairPoint
• Six Flags
9
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Accuride
Free cash flow
Operating performance
EBITDA EBITDA capex /
EBITDA margin
interest
FCF
Leverage
Other
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Quarterly EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 12/31/08
931,409
6.0%
51,052
5.5%
0.41
(38,850)
294,625
651,169
5.77
12.76
146,076
31%
39.7
46.3
33.7
11,304
LTM 3/31/09
836,775
5.2%
41,496
5.0%
0.35
(35,287)
321,440
599,540
7.75
14.45
60,492
32%
41.7
60.7
34.5
1,055
1,400
LTM 6/30/09
LTM 9/30/09
727,069
1.8%
13,249
1.8%
(0.13)
(29,727)
354,337
632,437
26.74
47.73
49,057
29%
42.5
55.5
26.9
(7,877)
(3,500)
632,791
0.5%
(1,279)
-0.2%
(0.35)
(56,730)
357,214
631,693
(279.29)
(493.90)
26,517
28%
41.8
49.1
22.8
(5,761)
11,154
15,000
Accuride Corporation is a manufacturer and supplier of commercial vehicle components in North America. Accuride's products include commercial vehicle
wheels, wheel-end components and assemblies, truck body and chassis parts, seating assemblies and other commercial vehicle components. The Company
believes that it has a number one or number two market position in several products including steel wheels, forged aluminum wheels, brake drums, and disc
wheel hubs. The Company serves OEMs, and their related aftermarket channels in most major segments of the commercial vehicle market. Key customers
include Daimler Truck North America, PACCAR, International Truck, and Volvo/Mack, which combined account for approximately 53% of net sales in 2008.
Strengths
• Market Leadership: Accuride is a market leader in truck wheels with long term relationships with many of the key manufacturers. When the economy
improves, it is probably safe to assume that Accuride will get its fair share, if not more
• Margin Improvement: Historically the company has done a good job of managing through a downturn and then substantially improving margins through a
recovery. For example, pre TTI merger Accuride’s EBITDA margins improved from 12.3% in 2001 to over 19% in 2002
• Positive industry trends supporting future demand for new trucks: According to ACT Research, statistics such as fleet age are at its highest point since 1986,
which could imply that existing trucks will be replaced soon
Weaknesses
• Cyclical industry/declining sales and EBITDA: Sales and EBITDA have fallen sharply given the decline in the economy and in new truck sales
• Negative industry trends related to new truck sales. With fleet operators facing declining trends in volumes, pricing, and utilization, there is little incentive to
buy new trucks
• Lack of geographic diversity: In 2008, only 16.8% of sales were to customers outside of the US
• Customer concentration: Top four customers represent over 50% of sales
• Sensitivity to the price of raw materials (aluminum and steel) but pass through and hedging agreements with customers exist
Summary:
The Company operates in a highly cyclical industry so until the economy and the market for heavy duty trucks improves the Company’s sales and EBITDA will
be under pressure. However, when the economy does improve, the Company should be well positioned to take advantage of an upturn.
10
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Citadel Broadcasting
Free cash flow
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt to
EBITDA
Total debt to
EBITDA
Total Liquidity
Quarterly EBITDA
(AR 80%+Inv
60%+PPE
33%)/Total Debt
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
863,121
59.1%
250,895
29.1%
1.14
121,662
2,010,681
2,059,041
8.01
8.21
30,634
10%
59,845
LTM 3/31/09
816,098
57.6%
225,649
27.6%
1.12
119,435
2,011,650
2,059,381
8.91
9.13
27,357
8%
24,506
N/A
LTM 6/30/09
LTM 9/30/09
774,973
57.2%
199,742
25.8%
0.92
102,043
2,033,453
2,081,367
10.18
10.42
28,839
9%
51,784
N/A
744,893
56.8%
186,972
25.1%
0.74
48,596
2,056,233
2,104,330
11.00
11.25
27,422
9%
50,837
N/A
61,949
Citadel is a radio-broadcasting company comprised of two segments. The Radio Market segment represents 83% of revenue and contains the company’s 165
FM stations and 58 AM stations in more than 50 markets. The Radio Network segment represents 17% of revenue and contains the ABC Radio Networks,
which creates and distributes programming to more than 4,000 affiliates and provides both sales and distribution services for the ESPN Radio Network.
Strengths:
• Geographic diversity; solid market share in markets served
• Solid portfolio of assets that could be sold when markets recover
• Strong historical cash flow/minimal capex: free cash flow was greater than $120 million in each of the past five years
• A cost-reduction plan has reduced expenses, but it is unclear how much cost has been permanently reduced. It appears that some costs are down because
of the lower revenue and the loss of the two network programs
Weaknesses:
• High leverage
• Competition from terrestrial radio, Internet, satellite radio, and portable music players
• Dependence on advertising, particularly from companies in weaker sectors such as auto, restaurants and banks
• Competition among local media outlets for advertising dollars is increasing amid a declining pool of traditional advertisers
• Longer-term revenue growth might be difficult due to changes in the advertising market, such as advertisers diverting a portion of expenditures to Internetbased media
Summary:
The company has a solid portfolio of radio assets and EBITDA has improved in 2009 but the weak advertising market, competition and secular changes to the
radio industry are areas of concern.
11
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
FairPoint Communications
Free cash
flow
Operating performance
EBITDA EBITDA capex /
margin
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Quarterly EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
A/R
days
Inv.
days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
EBITDA
LTM 12/31/07
1,274,619
54.7%
313,445
24.6%
10.2%
(239,487)
1,930,000
2,480,006
6.16
7.91
125,025
33%
48.2
23.6
72.1
50,487
136,163
LTM 3/31/08
1,303,835
55.0%
304,055
23.3%
-12.9%
(226,168)
1,976,700
2,518,412
6.50
8.28
97,242
33%
52.8
23.2
98.5
74,071
125,088
LTM 6/30/08
LTM 9/30/08
1,258,756
54.3%
274,473
21.8%
-7.0%
(253,856)
1,967,625
2,497,277
7.17
9.10
83,364
33%
57.5
26.7
120.6
78,918
90,892
1,198,785
54.0%
228,919
19.1%
-4.4%
(162,504)
1,965,450
2,513,676
8.59
10.98
65,629
32%
62.1
23.5
101.4
25,443
-
FairPoint Communications, Inc. is a provider of communications services to residential and business customers including local and long distance voice, data,
and broadband services. FairPoint operates 32 local exchange companies in 18 states with approximately 1.7 million access line equivalents. The companies
operate as the incumbent local exchange carrier in each of their respective markets.
In March 2008, FairPoint acquired Verizon’s Northern New England wireline business for approximately $2.0B or 5.6x EBITDA. This transaction transformed
Fairpoint from a relatively small telecom company into the 7th largest local exchange carrier in the US. FairPoint’s proforma revenue and EBITDA were
expected to be $1.4B and over $600million versus approx $280 million and $115 million before the acquisition. However, the Company experienced several
issues that caused the Company to significantly underperform those expectations and ultimately file for bankruptcy.
Strengths:
• Solid operating base given that the Company is the incumbent local exchange carrier in each of its markets
• Growth opportunities in terms of DSL
• Cost structure should stabilize given the transition from Verizon has been completed
Weaknesses:
• Declining demand for traditional wireline telecom services. The Company and industry in general have experienced a decrease in access lines as
businesses and consumers have switched to wireless and VOIP
• Regulatory issues: The Company is regulated by the various state public utilities commissions in which it operates
• Weak EBITDA and cashflow trends: Third quarter EBITDA was $25 million and cashflow was negative
• Customer service issues: The transition from Verizon’s network was not as smooth as anticipated and, as a result, there were various customer service
issues
• Competition: Cable providers offering the triple play have gained customers at FairPoint’s expense
Summary:
FairPoint has struggled with many issues over the past several quarters however the company is the incumbent local-exchange carrier in its markets, which
gives it a solid operating base. If the company can complete its restructuring and solve its technology issues it may be able to focus on its business again,
which should allow it to at least stabilize sales and potentially grow over the next few years.
12
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Six Flags
Free cash
flow
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
(AR 80%+Inv
Senior debt Total debt to
60%+PPE
to EBITDA
EBITDA
Total Liquidity 33%)/Total Debt
Quarterly EBITDA
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
1,021,298 50.5%
269,052
26.3%
1.13
(37,495)
1,081,700
2,366,242
4.02
8.79
211,832.00
23.1%
29.3
33.1
33.5
6,040
5,153
LTM 3/31/09
1,004,974 50.2%
264,951
26.4%
1.31
(89,493)
1,086,283
2,311,909
4.10
8.73
80,352.00
24.0%
39.1
33.4
32.8
(61,588)
(60,938)
LTM 6/30/09
LTM 9/30/09
961,369 48.4%
929,064 41.1%
234,671
208,804
24.4%
22.5%
1.11
0.97
(31,486)
(4,173)
1,153,975
-
1,153,975
-
4.92
-
4.92
-
128,838.00
262,126.00
49.5%
0.0%
10.4
9.2
21.3
12.2
16.5
8.5
54,690
209,662
56,322
220,160
Six Flags is an operator of 20 regional theme parks with locations primarily in the United States. The Company has several well-known theme parks including
Six Flags Great Adventure, Six Flags Over Texas and Six Flags Great America. Total attendance increased to 25.34 million in 2008 from 24.9 million in 2007
and adjusted EBITDA increased to $275 million in 2008 from $189 million in 2007. Attendance for the first nine months of 2009 was 21.2 million, down 5%
from 22.2 million in the same period of 2008.
Strengths
•
•
•
•
Geographic diversity in the US
Strong brand name
Strong Sales and EBITDA in 2008 despite the economy
Relatively cost effective entertainment option
Weaknesses
• Weak operating metrics: Attendance and per capita spend are both down in 2009 versus 2008
• Limited opportunities to meaningfully increase EBITDA particularly considering the weak advertising markets and employment trends which limits
sponsorship transactions and group attendance
• High capex and fixed costs
• Numerous competitors in the form of other theme parks and entertainment options in key markets
Summary:
With little room for improvement in EBITDA, substantial capex, a recession impacting consumer spending, Six Flags faces many challenges.
13
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Healthcare
The dominant theme for participants in the healthcare industry during 2009 was the
healthcare reform legislation being negotiated in both houses of Congress. The
legislation has changed considerably since first introduced with the Senate and House
versions now being reconciled. Facing uncertainty in regulatory, reimbursement, and
economic spheres, participants appeared to build liquidity throughout 2009. Operating
performance has been generally good throughout 2009 despite increasing unemployment
and continuing weak economic conditions. For 2010, the uncertainty related to regulatory,
reimbursement, and economic conditions has abated somewhat. That said, industry
participants will likely continue to build liquidity until the final form of healthcare legislation
is known.
Companies discussed include:
•Iasis Healthcare LLC
•LifeCare
•Rotech Healthcare, Inc.
•Sun Healthcare Group, Inc.
•Vanguard Health Systems, Inc
14
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Iasis
Free cash flow
Operating performance
Other
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Quarterly EBITDA
Sales
GPM
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
2,115,066
36.3%
261,566
12.4%
1.72
47,776
626,123
1,110,193
2.39
4.24
230,139
49.3%
36.5
12.4
16.6
65,450
66,700
LTM 3/31/09
2,150,804
36.6%
276,033
12.8%
2.15
78,548
624,651
1,108,242
2.26
4.01
259,436
50.8%
37.6
12.5
16.5
84,909
86,159
LTM 6/30/09
LTM 9/30/09
2,219,862
2,361,972
36.4%
36.3%
284,996
229,716
12.8%
9.7%
2.51
2.15
140,294
166,337
577,623
-
1,060,951
1,059,837
2.03
-
3.72
4.61
316,425
206,528
52.1%
51.3%
37.0
34.2
11.5
11.3
15.6
15.6
77,310
2,047
78,560
67,936
EBITDA
EBITDA EBITDA capex /
margin
interest
Leverage
FCF
Senior debt
Total debt
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
A/R
days
Inv.
days
A/P
days
Iasis Healthcare LLC, is an operator of (a) 15 acute care hospitals and one behavioral facility with 2,789 total beds in six regions (73.8% of 2008 revenue); and
(b) Health Choice Arizona, Inc., Phoenix, Arizona, a Medicaid and Medicare managed health plan serving 181,000 members (26.2% of 2008 revenue). The
Company considers the acute care hospitals to be located in regions with strong population growth attributes relative to the rest of the US. Acute care
hospitals are located in Salt Lake City, Utah; Phoenix, Arizona; Tampa-St. Petersburg, Florida; metropolitan San Antonio, Texas (3); Las Vegas, Nevada; and
West Monroe, Louisiana. The Health Choice contract with the Arizona Health Care Cost Containment System commenced October 1, 2008 with a three-year
term followed by two additional one-year options. The Company was acquired during June 2004 by an investor group lead by Texas Pacific Group (74.4%),
JLL Partners Inc. (18.85%), and Trimaran Fund Management L.L.C. (6.8%).
Strengths
• Strong liquidity with the revolving loan commitment portion of the senior secured credit facilities maturing on April 17, 2013
• Service offering resulted in steadily increasing LTM revenue and an EBITDA margin consistently in the range of 12% since September 2008. Plant is
modern with no deferred capital spending anticipated
• All hospitals are properly licensed and accredited by the Joint Commission (formerly the Joint Commission on Accreditation of Healthcare Companies)
• Demonstrated ability to successfully navigate the complex regulatory systems governing licensing, accreditation, operations, and reimbursement
Weaknesses
• Continuing weak economic conditions may drive uncompensated and charity care to higher levels
• Revenue is highly concentrated from Medicare and Medicaid payers whose changes could adversely affect reimbursement rates
• The healthcare industry is highly competitive and highly regulated by a myriad of federal, state, and local government and government agencies
• It is unclear what the impact of the healthcare reform proposal currently under consideration by Congress will have on industry participants
Summary
Iasis Healthcare operates in the highly competitive and extensively regulated health care industry. The Company’s hospitals are all licensed to operate in the
various local jurisdictions and fully-accredited by the Joint Commission. The Company has strong liquidity, no near term debt maturities, and consistent
EBITDA margins. Like all participants in the healthcare industry, it is unknown at this time what the magnitude and breadth of the impact of the healthcare
reform legislation currently under consideration by Congress will be on industry participants.
15
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
LifeCare
Operating performance
Sales
GPM
EBITDA
EBITDA margin
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Quarterly EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
A/R
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
351,971
35.5%
38,874
11.0%
0.68
(811)
256,713
390,332
6.60
10.04
67,562
21%
63.9
37.9
13,843
13,589
LTM 3/31/09
358,234
36.0%
42,467
11.9%
1.01
8,976
281,700
414,876
6.63
9.77
60,624
21%
66.4
41.7
13,463
16,460
LTM 6/30/09
LTM 9/30/09
363,247
36.8%
43,217
11.9%
1.08
1,747
280,438
413,300
6.49
9.56
56,118
20%
69.9
42.6
8,774
12,000
365,114
37.4%
44,523
12.2%
1.18
19,266
279,800
411,260
6.28
9.24
72,285
17%
66.7
41.8
8,443
9,200
LifeCare Holdings operates a network of long-term acute care hospitals (“LTACHs”) that serve patients too healthy to remain in intensive-care facilities, but
needing specialty care above what is provided at home or in a nursing home. Key examples include patients with respiratory, skin and other complex medical
needs. The company operates 11 freestanding hospitals and nine "hospital within a hospital" facilities, for a total of 20 facilities in 10 states.
Strengths:
• Favorable Medicare reimbursement environment
• Good portfolio of facilities although 10 of the 20 are concentrated in the Dallas, San Antonio, TX and Shreveport, LA areas
• Sales, EBITDA and margins have improved
• Management’s focus on increasing patient acuity has favorably impacted revenue
• Good liquidity
Weaknesses:
• High total leverage/minimal free cash flow
• Operating metrics down versus the previous year
• Payer mix/Regulatory risks. While the outlook for Medicare reimbursement for LTACHs is currently favorable, the situation can change quickly. Medicare has
reduced reimbursement rates and amended/increased various rules for LTACHs in the past
• Weak historical performance as revenue and EBITDA have declined despite more beds in 2009 versus 2005. According to the Company, 2005 adjusted
EBITDA was $76.7 million
• Limited revenue and EBITDA growth opportunities/high fixed costs
Summary:
• While EBITDA has rebounded from the 2007-2008 lows, the Company still faces several issues most importantly is its high leverage/capital structure. The
Medicare reimbursement environment is currently favorable which should give it an opportunity to reduce debt over the next several quarters.
16
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Rotech
Free cash
flow
Operating performance
Sales
GPM
EBITDA
EBITDA margin
EBITDA capex /
interest
FCF
Leverage
Other
Senior debt
Senior debt Total debt to EBITDA
Total debt to
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
544,533
73.0%
73,246
13.5%
0.51
19,141
212,561
500,087
2.90
6.83
74,700
19%
45.8
27.0
79.3
21,460
N/A
LTM 3/31/09
524,852
73.5%
77,587
14.8%
0.75
8,049
219,866
507,355
2.83
6.54
69,847
20%
50.0
27.7
67.5
20,591
N/A
LTM 6/30/09
LTM 9/30/09
495,976
485,667
74.7%
75.8%
80,828
89,230
16.3%
18.4%
0.91
1.01
23,602
14,155
233,452
225,765
510,914
513,166
2.89
2.53
6.32
5.75
69,525
83,088
19%
19%
53.5
48.0
31.5
35.0
71.1
90.0
21,601
25,578
N/A
N/A
Rotech Healthcare, Inc. participates in the home health care industry with revenue derived from the rental and sale of (a) oxygen and other respiratory therapy
equipment and systems, and medications (88.6% of 2008 revenue); and (b) durable medical equipment (10.4% of 2008 revenue). The Company has a
nationwide presence with approximately 450 operating locations in 48 states. Equipment and services are primarily provided to older individuals with breathing
disorders related to chronic obstructive pulmonary diseases (COPD). COPD is a group of diseases such as chronic bronchitis, emphysema, and sleep apnea
that results in narrowing airways, and shortness of breath. COPD is the fourth most common cause of death in the United States. Approximately 59% of
revenue for the nine months ended September 2009 was derived from Medicare, Medicaid, and other federally funded programs (Department of Veterans
Affairs).
Strengths
• Nationwide distribution system with approximately 450 non-urban locations in 48 states
• Strong service offering as products and services are critical to the health and well being of its patients and may not be deferred
• The Company reported unrestricted cash of $69.5 million at September 2009
• Systems are in place to monitor compliance with the complex regulatory systems governing licensing, accreditation, operations, and reimbursement.
• The Company reported it was in compliance with the covenants
Weaknesses
• The Company is highly leveraged with the senior secured credit facility due September 26, 2011 and the 9.5% senior subordinated notes due April 1, 2012
• Revenue is highly concentrated among Medicare, Medicaid, and other federally funded programs
• The healthcare industry is competitive and highly regulated at the federal, state, and local levels
• The final form of the potential healthcare reform legislation currently in Congress is unknown
Summary:
Rotech operates in the highly regulated home healthcare industry. The Company has a nationwide platform with most revenue derived from the rental and sale
of oxygen and other respiratory therapy equipment and related medication. Each of the approximate 450 locations is accredited by the Joint Commission and
the Company’s record regarding regulatory compliance is satisfactory. Like all participants in the healthcare industry, it is unknown at this time what the
magnitude and breadth of the impact of the ‘healthcare reform’ legislation currently under consideration by Congress will be on participants in the home
healthcare industry.
17
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Sun Healthcare
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
1,824,184 13.0%
160,607
8.8%
2.09
45,291
525,841
725,841
3.27
4.52
142,153
50%
39.5
12.6
38,784
LTM 3/31/09
1,834,238 13.2%
165,521
9.0%
2.16
63,971
506,286
706,286
3.06
4.27
149,945
52%
39.8
13.4
43,105
43,272
N/A
LTM 6/30/09
LTM 9/30/09
1,848,930 13.1%
1,863,101 13.4%
162,840
165,181
8.8%
8.9%
2.12
2.13
57,756
63,653
503,216
502,600
704,282
702,576
3.09
3.04
4.32
4.25
145,672
167,405
53%
53%
41.1
40.8
12.8
11.6
41,992
41,300
46,292
42,172
Sun Healthcare Group, Inc. participates in the domestic healthcare industry providing a wide array of inpatient services principally to the senior population.
Inpatient services (89% of 2008 revenue) are delivered at 207 locations comprised of (a) 184 skilled nursing centers; (b) 15 assisted living centers; and (c)
eight mental health facilities with an aggregate 22,345 licensed beds in 25 states.
Strengths
• Strong liquidity at September 2009 of $167 million comprised of unrestricted cash of $117 million and revolving loan availability of $50 million. Senior
secured obligations come due on April 13, 2013
• Consistent gross margin of 13% drives steady LTM EBITDA margin approximating 9% at the close of the previous four quarters
• Senior and total leverage of 2.1x and 4.3x is considered manageable given the consistency of quarterly EBITDA in the range of $38 million to $45 million
since December 2007
• Demonstrated ability to successfully navigate the complex regulatory system governing licensing, certification, operations, and reimbursement
Weaknesses
• Difficult reimbursement environment as several states have implemented rate freezes and cuts in Medicaid to balance budgets. The Centers for Medicare
and Medicaid Services recently issued changes that result in a net reduction in reimbursement rates through 2010
• The healthcare industry is highly competitive
• The healthcare industry is extensively regulated by federal, state, and local government regulation governing licensing, operations, certification, and
reimbursement
• The final form of the potential health care reform legislation currently in Congress is unknown and could alter the health care industry in a manner adverse to
the Company
Summary:
The Company performed well during the quarter ended September 2009. Total debt is manageable and coverage ratios continue to be satisfactory. On
September 9, 2009, the Company reported modestly lower guidance with respect to revenue and EBITDA for the year ending December 31, 2009 due to lower
reimbursement rates from Medicare and Medicaid. The challenges confronting the Company going forward are related to reimbursement rates that will be
under continuous pressure at the state and federal level, and the final form of the potential health care reform legislation.
18
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Vanguard Healthcare
Free cash
flow
Operating performance
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Quarterly EBITDA
(AR 80%+Inv
Senior debt Total debt to
60%+PPE
to EBITDA
EBITDA
Total Liquidity 33%)/Total Debt A/R days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 12/31/08
2,953,800
25.5%
279,400
9.5%
1.34
129,700
770,300
1,544,300
2.76
5.53
454,400
42%
33.8
23.8
77,700
78,500
LTM 3/31/09
3,086,200
25.6%
290,200
9.4%
1.41
167,100
768,300
1,547,800
2.65
5.33
512,000
43%
32.6
23.5
85,000
86,200
LTM 6/30/09
LTM 9/30/09
3,199,700
3,304,100
25.3%
24.6%
298,000
301,900
9.3%
9.1%
1.46
1.35
176,100
213,200
766,400
766,400
1,551,600
1,555,400
2.57
2.54
5.21
5.15
527,000
608,100
41%
41%
32.3
30.2
21.3
21.0
73,500
65,700
74,500
68,700
Vanguard Health Systems, Inc., headquartered in Nashville, Tennessee, participates in the domestic health care industry operating (a) 15 acute care hospitals
with 4,135 licensed beds and complementary outpatient facilities in four metropolitan markets (79% of FYE June 2009 revenue) and (b) three managed care
plans in Arizona (2) and metropolitan Chicago (21% of FYE June 2009 revenue) serving 218,700 members at June 2009. Acute care hospitals are located in
San Antonio, Texas; the metropolitan area of Phoenix, Arizona; the metropolitan area of Chicago, Illinois; and Massachusetts. The Company was originally
organized during 1997 and was acquired by the Blackstone Group during 2004.
Strengths∙
• Strong liquidity of $608 million comprised of unrestricted cash of $389.3 million and unused revolving loan commitment of $218.8 million at September 2009
• The hospital groups are clustered among four major metropolitan areas that are convenient to and easily accessed by nearby populations
• Demonstrated ability to recruit nurses and physicians with 50 and 150 new physicians during FY2008 and FY2009, respectively
• Strong service offering drives steadily increasing revenue and results in EBITDA margins in excess of 9% during each of the four fiscal years. Plant is
modern and up to date with no deferred capital spending anticipated
Weaknesses∙
• Company is highly leveraged and exposed to both interest rate and refinancing risks given the current state of uncertainty in the financial markets. The
Company recently launched $1 billion notes offering as part of a leveraged recapitalization
• The healthcare industry is highly competitive and heavily regulated by a myriad of federal, state, and local governments and agencies
• Receivables are highly concentrated since 56.1% of revenue is derived from Medicare (39.4%) and Medicaid (16.7%)
• It is unclear what the impact of the ‘healthcare reform’ proposal currently under consideration by Congress will have on industry participants
Summary:
Vanguard Health Systems operates in the highly regulated health care industry. The Company’s hospitals are all licensed to operate in the various local
jurisdictions and fully-accredited by The Joint Commission. Importantly, the hospital groups serve highly populated metropolitan areas of San Antonio,
Phoenix, Chicago, and Massachusetts characterized by high population growth and median income in excess of national averages. Like all participants in the
healthcare industry, it is unknown at this time what the magnitude and breadth of the impact of the ‘healthcare reform’ legislation currently under consideration
by Congress will be on industry participants.
19
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Media: General
While 2009 was a difficult year for Media firms, there were a few bright spots in the
industry. For example, those firms that focused on providing consumers with value
(Valassis) and sold into stable end-markets (Cengage) were examples of firms that
survived 2009 relatively unscathed. For 2010, the key factors for these two companies
are again the threat of Internet based competition and their ability to adapt in a changing
marketplace. Valassis Communications has been able to do this by shifting distribution of
its shared mail packages to direct mail as opposed to newspapers. Cengage on the
other hand faces competition from used book and book rental websites that threaten its
lucrative new text book business:
Companies discussed:
• Cengage
• Valassis
20
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Cengage Learning
Free cash
flow
Operating performance
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
Quarterly EBITDA
(AR 80%+Inv
60%+PPE
A/R
33%)/Total Debt days Inv. days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 12/31/08
1,839,016
58.8%
647,365
35.2%
0.81
135,247
4,059,600
6,229,100
6.27
9.62
537,800
6%
77
92.2
176.2
153,000
LTM 3/31/09
1,863,300
59.8%
685,000
36.8%
0.86
129,893
4,049,400
6,022,500
5.91
8.79
354,800
5%
70
116.8
202.6
59,500
59,500
LTM 6/30/09
LTM 9/30/09
1,958,000
1,895,200
59.9%
59.2%
740,800
701,700
37.8%
37.0%
0.94
0.91
85,000
137,500
4,223,300
4,099,100
5,934,500
5,818,900
5.70
5.84
8.01
8.29
141,600
115,800
7%
8%
52
48
92.1
69.0
156.3
135.9
132,700
356,500
132,700
356,500
153,000
Cengage Learning is a provider of proprietary publications and information-based solutions for academic, professional and library markets worldwide. The
company delivers teaching, learning and research solutions to colleges, schools, instructors, students, and libraries. The company has two reportable
segments, APG and Gale:
• APG is the company’s largest segment (approximately 90% of sales), and it provides both print-based and digitally-enabled learning solutions to students,
faculty, institutions and professionals in the secondary and post-secondary education markets. The company publishes for a range of disciplines within the
academic market, including business and economics, mathematics, physical sciences, computing, humanities, and social sciences.
• Gale provides specialized products that support education and research in academic and K-12 libraries and offers resources that support the information
needs of public-library users.
Strengths
• Stable demand in the education market
• Large portfolio of books and publications, both print and digital
• Solid market position
• Revenue, EBITDA and margins have improved
Weaknesses
• High total leverage/minimal free cash flow relative to debt
• Covenants: the company is in no danger of violating covenants, but that does not mean that senior leverage is low. In this case the covenants were set with
too much cushion, with the lowest senior-leverage covenant at 7.75x
• Growth rate is below competitors
• Negative trends in terms of state budgets that will depress funding for libraries and schools in general
• The used-book market should continue to impact publishers of new books given the high cost of new textbooks
• Technology risk: e-books, book-rental websites and the availability of information on the Internet could affect publishers
• Sensitivity to commodity prices, particularly paper
Summary:
The company has performed well despite the economy, which speaks to the stability of the company’s sales and EBITDA. However, the company’s leverage,
free cash flow and growth prospects are areas of concern.
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
21
Valassis Communications
Free cash
flow
Operating performance
Other
Quarterly EBITDA
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
2,381,907 22.1%
200,332
8.4%
1.84
71,598
610,727
1,202,567
3.05
6.00
216,056
40.7%
64.5
8.9
56.1
56,729
62,566
LTM 3/31/09
2,335,981 21.7%
192,496
8.2%
0.64
114,845
576,360
1,116,417
2.99
5.80
174,493
39.9%
74.4
9.9
67.3
52,041
53,873
LTM 6/30/09
LTM 9/30/09
2,285,093 22.2%
2,265,506 23.6%
202,016
229,890
8.8%
10.1%
0.70
0.68
121,012
150,146
553,247
512,400
1,093,305
1,052,426
2.74
2.23
5.41
4.58
230,639
110,865
35.9%
40.0%
66.8
65.6
8.8
7.6
75.4
87.4
61,486
59,634
64,978
63,902
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
Leverage
FCF
Senior debt
Total debt
(AR 80%+Inv
Senior debt Total debt to
60%+PPE
A/R
to EBITDA
EBITDA
Total Liquidity 33%)/Total Debt days
Inv.
days
A/P
days
Valassis is a marketing services and printing Company that offers a variety of services to clients primarily in the consumer products, retail, financial and
telecom verticals. The Company offers a number of marketing programs including, shared mail, free standing inserts (FSI), run of the press (ROP), and product
sampling. The Company’s main products are shared mail and FSI, which are individual print advertisements of various clients aggregated in a single package
or booklet, delivered through the USPS or newspapers. For the third quarter, shared mail and FSI represented 59% and 17% of total revenue.
Strengths:
• Positive industry trends particularly with regard to coupon redemption trends
• Solid Customer Base: The Company’s key clients include those in consumer products, grocery, and drug stores. The Company does not have material
exposure to the hardest hit industries in this recession such as auto, real estate and building materials
• Strong Market share in FSI: The Company estimates that its market share in FSI was approximately 42% in the second/third quarter
• Strong Free Cashflow: Cashflow was minimal in the third quarter but it is strong on a year to date basis. The fourth quarter is typically a strong quarter for
cashflow. Capex for 2009 is expected to be $20 million versus $25 million in 2008
Weaknesses:
• Dependence on advertising: The Company derives most of its revenue from the advertising and promotional activities of its clients. These types of
expenditures are cyclical and have low switching costs
• Dependence on newspaper circulation: The general decline in newspaper circulation negatively impacts the FSI and ROP business because they are
delivered through newspapers. However, the company has noted that it is shifting customers to Shared mail to offset this decline
• Increasing Costs: The company has had substantial success in reducing costs but it is unclear how much has been permanently reduced. Also, the USPS
recently announced that it was facing substantial losses. If the USPS increases postage rates and/or reduces delivery services this could decrease the
Company’s margins. However, the company, based on recent comments by the USPS, believes that postage rates appear stable in 2010
• Technology Risk: As the share of internet based/digital advertising increases, it will likely negatively impact the Company’s core businesses. Valassis does
have a digital media division but it generated less than 7% of total revenue
• Competition: There are numerous competitors in the direct mail and print advertising industries including News America Marketing
Summary:
The Company has performed well with margins and EBITDA increasing as a result of the favorable industry trends and the company’s cost reduction initiatives.
22
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Media: Radio/TV/Newspaper
In 2009, Media companies had a difficult year as many firms suffered from the weak
economy, competition from Internet based alternatives, poor advertising markets, and
high leverage.
For 2010 the longer-term outlook is still negative even with an improving economy given
the secular changes impacting the industry such as competition from internet based
alternatives. The key factor to watch going forward is how these firms adapt to the
internet. Many of them offer content on-line but it remains to be seen if they can
generate meaningful revenue to at least partially offset what has been lost over the past
few years. With leverage ratios at some firms well over 7x and cash flow minimal, their
ability to generate cash flow and reduce debt will be key to avoiding bankruptcy. Citadel
recently filed for bankruptcy as slow revenue growth, high leverage and a covenant issue
ultimately forced the company into a formal restructuring. That said, while the longerterm outlook is negative, 2010 might see an uptick in revenue as the economy and the
advertising markets rebound. Also, local TV could see some additional improvement as
2010 is an election year.
Companies discussed include:
• Cumulus Media
• Emmis Communications
• Gatehouse Media
• Gray TV
23
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Cumulus Media
Free cash
flow
Operating performance
Sales
GPM
EBITDA
EBITDA margin
EBITDA capex /
interest
FCF
Leverage
Other
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Total Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
311,538
35%
88,991
28.6%
2.45
70,585
696,000
696,000
7.82
7.82
153,003
8%
57
37
12/31/2008
21,993
LTM 3/31/09
293,991
34%
79,648
27.1%
2.73
68,526
682,244
682,244
8.57
8.57
144,877
7%
63
41
3/31/2009
6,947
7,539
LTM 6/30/09
LTM 9/30/09
276,325
35%
75,861
27.5%
3.09
49,119
644,081
644,081
8.49
8.49
32,382
8%
50
39
3/31/2009
22,772
23,383
261,502
35%
71,004
27.2%
3.02
40,884
642,445
642,445
9.05
9.05
39,192
7%
55
39
3/31/2009
19,292
20,142
22,776
Cumulus Media is an owner and operator of FM and AM radio stations serving mid-size and smaller cities throughout the United States. Cumulus is the second
largest radio broadcast company in the United States based on station count, and in combination with its affiliate Cumulus Media Partners, LLC, the company
believes it is the fourth largest radio broadcast company in the United States based on net revenues. In total, the company currently controls approximately 350
radio stations in 68 U.S. media markets.
Strengths:
• Geographic and station diversity
• Historical cash flow/ Minimal capex
• Cost reduction plan has significantly reduced expenses
Weaknesses:
• High leverage
• Dependence on advertising, particularly from companies in weaker sectors such as auto, restaurants and banks
• Numerous competitors in terms of radio, internet, satellite, portable media players and etc. Dependence on advertising and in particular advertisers in weak
sectors of the economy including auto, restaurants and banks
• Revenue growth: Longer term revenue growth might be difficult due to more secular changes in the advertising market, such as advertisers diverting a
portion of expenditures to internet-based media and issues at traditionally strong advertising categories
Summary:
The Company has had a difficult year but managed to stabilize EBITDA due to its cost reduction plan. While reducing expenses is usually a positive step, at
some point revenue must increase if the company is to delever. That may be difficult over the near term but with stable EBITDA the company has bought some
time for the markets to recover
24
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Emmis Communications
Operating performance
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
GPM
EBITDA
LTM 2/28/09
333,873 23.0%
58,299
17.5%
0.46
19,158
421,355
422,412
7.23
7.25
192,931
13%
71.2
20.4
3,568
LTM 5/31/09
309,455 20.2%
45,731
14.8%
(0.21)
25,725
347,000
347,823
7.59
7.61
88,928
15%
65.8
22.1
4,018
4,018
LTM 8/31/09
283,198 17.6%
34,533
12.2%
(0.31)
20,114
346,104
347,149
10.02
10.05
29,425
15%
59.8
17.5
9,995
10,171
LTM 11/30/09
262,640 16.7%
29,138
11.1%
0.10
7,824
343,000
344,103
11.77
11.81
29,617
15%
63.7
18.9
11,557
11,735
Sales
A/R
days A/P days LCD EBITDA
Company
adjusted
EBITDA
EBITDA
margin
3,430
Emmis Communications owns and operates radio and magazine entities in large and medium sized markets throughout the U.S. Emmis’ key radio markets
are Los Angeles, New York, Chicago, Austin, St. Louis and Indianapolis.
Strengths:
• Good market presence in key media markets New York and Los Angeles. Over 50% of revenue is derived from these markets
• Historical cash flow/ Minimal capex
• Cost reduction plan expected to reduce expenses by $10 million in 2009.
• Radio advertising in general is less expensive than other forms of advertising such as TV
• Liquidity: The company’s liquidity is adequate but limited with $16.5 million in cash and $13.1 million in availability
Weaknesses:
• High leverage
• Flat to declining near term revenue trends that are exacerbated by the loss of the Hungarian radio license that represented $9.5 million and $20.5 million in
net revenue for the first nine months of 2009 and for the full year 2008
• Numerous competitors in terms of radio, internet, satellite, portable media players and etc.
• Dependence on advertising and in particular advertisers in weak sectors of the economy including auto, restaurants and banks
• Despite Emmis’ presence in strong media markets, the company has underperformed relative to its competitors
• Revenue growth: Longer term revenue growth might be difficult due to more secular changes in the advertising market, such as advertisers diverting a
portion of expenditures to internet-based media and issues at traditionally strong advertising categories (see above)
Summary:
The company continues to struggle and is in need of an uptick in the economy and the advertising market if sales and EBITDA are to improve.
25
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Gatehouse Media
Free cash
flow
Operating performance
EBITDA capex /
interest
Leverage
Other
(AR 80%+Inv
Total
60%+PPE
A/R
Liquidity 33%)/Total Debt days
GPM
EBITDA
LTM 12/31/08
693,119 43.9%
105,987
15.3%
1.09
(18,929)
1,195,000
1,223,863
11.27
11.55
11,744
11%
39.8
10.0
18.3
27,083
LTM 3/31/09
663,399 42.7%
91,739
13.8%
1.03
(6,013)
1,195,000
1,225,218
13.03
13.36
9,236
10%
44.6
10.8
18.5
5,709
5,660
LTM 6/30/09
LTM 9/30/09
630,793 41.8%
81,412
12.9%
1.03
3,748
1,195,000
1,223,704
14.68
15.03
16,241
9%
37.3
9.8
16.3
21,966
22,064
604,121 41.8%
80,395
13.3%
1.13
1,053
1,197,000
1,208,589
14.89
15.03
12,513
9%
39.2
8.3
13.0
25,637
26,254
FCF
Senior debt
Total debt
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
EBITDA
margin
Sales
Senior debt Total debt to
to EBITDA
EBITDA
Quarterly EBITDA
27,135
Gatehouse Media is one of the largest publishers of locally based print and online media in the U.S., as measured by number of daily publications. The
portfolio of products includes 88 daily and 280 weekly newspaper along with over 250 websites. The Company believes that it reaches approximately 10
million people on a weekly basis and serves over 233,000 business accounts.
Strengths
• Geographic and advertising customer diversity
• Good market share as the company believes that it is usually the primary source of news and information for the small to midsized communities in which it
serves
• Low substitution risk as local advertisers have fewer options than national advertisers in reaching customers which benefits Gatehouse Media’s newspapers
and websites
• Cost reduction plan has reduced expenses and improved margins
• Low Capex
Weaknesses
• High leverage with minimal cash flow. YTD 2009 freecash flow is break-even versus $1.2 billion in debt. Term loans mature in 2014
• Dependence on advertising revenue as, historically, over 70% of revenue is generated from advertising with the remainder dependent on circulation (20+%)
and commercial printing
• Key advertisers such as help wanted, auto and real estate have struggled due to the economy. In addition, a quick recovery in these sectors is unlikely
• Increasing competition in terms of Internet based news and information, classified and help wanted sites
• Flat to decreasing subscription rates for the company and across the industry
• Minimal asset coverage
• Minimal Liquidity with no revolver availability and $12.5 million of cash
Summary
The Company had a difficult year and is faced with several challenges going forward. The good news for the Company is that it successfully reduced costs
which helped to improve the severe negative EBITDA trends experienced in Q1.
26
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Gray TV
Free cash flow
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt to
EBITDA
Total debt to
EBITDA
Quarterly EBITDA
Company
adjusted
EBITDA
Total Liquidity
LCD EBITDA
LTM 12/31/08
327,176
39.0%
113,507
34.7%
1.80
48,561
800,380
800,380
7.05
7.05
42,911
39,532
40,280
LTM 3/31/09
317,531
38.5%
107,717
33.9%
1.84
39,530
798,359
798,359
7.41
7.41
64,857
11,654
11,772
LTM 6/30/09
LTM 9/30/09
303,845
36.8%
96,454
31.7%
1.38
30,549
795,849
795,849
8.25
8.25
36,920
16,298
11,772
287,660
34.6%
84,449
29.4%
1.07
19,884
793,829
793,829
9.40
9.40
37,391
16,965
17,172
Gray Television, Inc. is a television broadcast company headquartered in Atlanta, Georgia that provides news and entertainment programming to 36 company
owned television stations serving 30 markets. Each of the stations are affiliated with either CBS (17 stations), NBC (10 stations), ABC (8 stations) or FOX (1
station). In addition, Gray currently operates 40 digital second channels including 1 ABC, 5 Fox, 8 CW and 16 MyNetworkTV affiliates plus 8 local
news/weather channels. Key markets include Charleston, Omaha, Lexington, KY, Tallahassee, FL, and South Bend, IN.
Strengths
• Geographic diversity with operations in 17 university towns and state capitals
• Good portfolio of stations in that 24 of the 36 stations are ranked #1 in their local markets with the remaining ranked #2
• Political Advertising, unlike other ad categories, is a stable source of revenue for Gray and the industry
• Good historical cashflow with manageable capex. However, cashflow has been negative in 2009, partially due to 2009 not being a strong election year
• Cost reduction plan has reduced expenses
• Recent retransmission agreements will increase revenue by $13 million in 2009. However, there is uncertainty regarding the sustainability of this revenue
• 2010 should be a better year for revenue given various state level elections and the Winter Olympics on NBC stations. However, the positive impact of the
elections in 2010 will not meaningfully impact EBITDA until the second half of 2010
Weaknesses:
• Revenue is dependent on local and national advertising and auto is still a major component of total revenue
• Total liquidity (cash+ revolver) is limited at $37 million
• The company is close to violating its leverage covenant
• Internet based news and weather information services potentially could draw viewers and advertisers from traditional media outlets like local TV
• Networks are exploring broadcasting programming on the Internet (Hulu.com) and setting up cable networks which would bypass affiliates
• Weak programming lineup at NBC
Summary:
The company had a difficult year and is faced with several challenges going forward. The good news for the company is that 2010 is an election year which
should positively impact EBITDA in 2010. However, the majority of that revenue will not occur until the second half of 2010 which means that the next few
quarters should be relatively flat with the third quarter unless the advertising market and economy improves.
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
27
Paper/Packaging
Participants in the domestic paper/packaging industry entered 2009 highly levered and
ladened with acquisition related debt while facing weak demand from worsening
economic conditions. Like other industrials, sector participants restructured to align
operations with quickly evaporating volume. Participants bounced off the first and second
quarter lows with steady quarterly revenue growth through the quarter ended September
30, 2009 from improving demand and firmer economic conditions.
For 2010, the sector is expected to continue to improve based on a firmer domestic
economy, a cautious industry wide approach to capacity increases, low inventory levels in
the distribution channels, and firmer prices. The cost of energy inputs and raw materials,
however, may serve to dampen the upside.
Companies discussed include:
• Appleton Papers Inc.
• Exopack
• Solo Cup
• Verso Paper Corp.
• Xerium Technologies, Inc
28
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Appleton Papers
Operating performance
Sales
GPM
EBITDA
EBITDA margin
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 1/03/09
964,577
25.2%
73,925
7.7%
(0.47)
(85,160)
327,173
604,053
4.43
8.17
56,280
49%
43.5
69.7
38.9
4,504
N/A
LTM 4/05/09
940,897
24.7%
72,669
7.7%
(0.10)
(59,431)
353,854
623,034
4.87
8.57
28,457
49%
40.9
75.1
31.7
22,812
N/A
LTM 7/05/09
LTM 10/04/09
904,529
871,660
25.6%
27.0%
80,238
84,545
8.9%
9.7%
0.35
0.72
(36,502)
22,622
352,923
333,662
624,903
569,631
4.40
3.95
7.79
6.74
25,989
43,839
47%
50%
43.5
42.2
74.9
64.4
30.0
30.4
33,809
23,420
N/A
N/A
Appleton Papers manufactures carbonless, thermal, and other specialty papers as well as plastic film and flexible packaging. The Company’s primary product
is carbonless paper sold under the NCR Paper brand pursuant to a long-term licensing agreement. Carbonless paper and affiliated products, which accounted
for 56% of 2008 revenue, are used in end products such as multipart business forms for invoices and receipts. Appleton manufactures rolls of carbonless paper
that are sold to paper converters, business forms printers, and merchant distributors. The Company anticipates that the market for carbonless paper will
continue its long-term decline. Thermal paper products, which accounted for 29% of 2008 revenue, are used for point-of-sale transactions, shipping labels,
tickets, and printer applications. The Company anticipates that new applications will drive continuing growth in this segment. Packaging applications and
security papers constituted 12% and 3%, respectively, of 2008 revenue. The five largest clients of the carbonless and thermal segments represented
approximately 38% and 36%, respectively, of 2008 revenue. The Company is owned by an ESOP.
Strengths
• Industry leader in the carbonless and thermal-paper segments, with a strong research-and-development function
• Entrenched base of clients in the carbonless and thermal-paper segments
• Liquidity for the most recent quarter was $44 million and comprised of cash of $4 million and revolver availability of $40 million
• No near-term debt maturities, as the maturities of the revolving loan commitment and term loan were extended to June 2012 and June 2013
• The Company believes that the recorded environmental liability is adequate
Weaknesses
• Continuing decline in the use of carbonless paper
• The Company is highly leveraged, with a capital-intensive business model
• Each of the carbonless and thermal business units remains dependent on several large clients for significant portions of revenue. Pricing power is limited
• Ongoing ESOP repurchases and other post-retirement benefit obligations could strain cash flow from operations and limit capital investment
Summary:
The Company has aggressively worked to reduce outstanding debt and performed reasonably well given general economic conditions and the continuing
decline in the use of carbonless paper. That said, Appleton’s balance sheet remains highly leveraged. This coupled with the capital intensive business model,
continuing ESOP related outlays, and other post retirement obligations may serve to strain cash flow during the coming quarters. The Company recently
projected compliance with the senior secured loan agreement though July 2010, but that projection is dependent upon continuing debt reductions and
achieving projected operating rates in a difficult environment.
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
29
Exopack
Free cash
flow
Operating performance
Sales
GPM
EBITDA EBITDA capex /
EBITDA margin
interest
FCF
Leverage
Other
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Quarterly EBITDA
(AR 80%+Inv
Total
60%+PPE
Inv.
Liquidity 33%)/Total Debt A/R days days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
781,732
10.5%
49,533
6.3%
0.98
(6,190)
294,574
294,574
5.95
5.95
31,512
60.6%
40.1
52.6
37.3
12,804
14,529
LTM 3/31/09
757,439
11.2%
53,390
7.0%
1.24
2,394
300,195
300,195
5.62
5.62
27,573
59.0%
42.4
51.4
38.2
15,490
18,018
LTM 6/30/09
LTM 9/30/09
724,963
11.4%
54,361
7.5%
1.09
4,685
293,392
293,392
5.40
5.40
26,295
59.4%
45.0
55.2
41.5
13,838
16,371
695,187
11.9%
54,331
7.8%
0.97
2,210
297,629
297,629
5.48
5.48
23,344
59.4%
43.9
53.8
41.2
12,199
15,516
Exopack is a provider of flexible packaging, film products, and specialty substrates in North America and Europe. The Company designs, manufactures and
supplies paper and plastic flexible packaging and film products to customers in a variety of industries, including the food, medical, pet food, chemicals, personal
care, lawn and garden and building materials. Exopack has 17 manufacturing facilities across the United States, Canada and the United Kingdom. The
customer base includes several Fortune 500 companies.
Strengths:
• Diversified by product type and end market. Consumer/food packaging segment is performing relatively well despite the economy
• Sales divided almost equally between paper and plastic which gives the Company some flexibility
• More than half of sales volume is under contract that allows for the pass through of raw material price increases, which leads to relatively stable margins over
the year. The remaining sales volume is transactional which also reduces commodity risk
• Revolver and Notes mature in 2011 and 2014
• Some asset coverage
Weaknesses:
• High Leverage/Flat historical EBITDA/Capex/minimal historical free cashflow
• Top 10 customers account for approximately 40% of its total revenue
• Numerous Competitors
• Some cyclicality given the exposure to the building materials and industrial industries
• Many commodity type products
• Numerous adjustments to EBITDA
Summary
While revenue and EBITDA have stabilized, the Company’s cashflow and leverage are areas of concern.
30
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Solo Cup
Operating performance
EBITDA
EBITDA
margin
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
Quarterly EBITDA
(AR 80%+Inv
60%+PPE
33%)/Total Debt A/R days Inv. days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 12/31/08
1,847,034
17.6%
143,324
7.8%
1.01
52,241
391,486
718,190
2.73
5.01
177,049
64%
28.8
80.3
21.5
23,584
31,800
LTM 3/31/09
1,735,408
16.9%
121,893
7.0%
0.70
59,784
303,138
696,642
2.49
5.72
124,025
64%
29.4
82.3
21.8
17,168
19,700
LTM 6/30/09
LTM 9/30/09
1,612,711
1,520,611
17.2%
17.7%
115,873
93,633
7.2%
6.2%
0.65
0.21
98,807
90,338
306,437
300,000
631,437
630,917
2.64
3.20
5.45
6.74
107,465
133,496
64%
64%
26.2
27.7
70.5
74.4
21.9
25.8
42,481
10,400
45,800
32,600
Solo Cup Company is privately owned and operated as a manufacturer and distributor of single use products utilized to serve food and beverages in home,
restaurant, and foodservice settings. Sales to the foodservice and retail clients represented 83% and 17%, respectively, of 2008 revenue. Products are sold
under the Solo®, Sweetheart®, Jack Frost®, Bare by Solo®, and Trophy® brands as well as private label. Products include cups, lids, food containers, plates,
bowls, cutlery, and food packaging containers with products available in plastic, paper, foam, recycled content, and other renewable materials. Revenue is
seasonal with the second and third quarters historically the strongest. Approximately 93% of revenue is generated in North America. Solo operates 15
manufacturing facilities and 13 distribution centers in North America, the UK, and Panama. Vestar Capital Partners IV, LP owns a minority interest.
Strengths
• No near term debt maturities, contractual principal payments, or liquidity issues as the Company reported cash of $24 million and revolving loan availability of
$110 million at September 2009
• Strong brand awareness and a leader in the $6.3 billion US cup and lid industry
• Entrenched client relationships with leading distributors and national accounts in North America
• Improving cash flow as cash from operations improved during the year to date period
• Plant considered modern and efficient as capital outlays remained in line with historical experience
Weaknesses
• Competitive industry with well capitalized participants including Dart Container, Georgia-Pacific, Pactiv, Berry Plastics, and International Paper
• Revenue growth dependent upon discretionary consumer spending
• LTM revenue at September 2009 steadily declined since the quarter ended December 2008
• LTM EBITDA of $94 million at September 2009 declined for the 6th consecutive quarter
Summary:
Given generally tough economic conditions, the Company has performed well during 2009. The Company did well to extend the maturities of the senior
secured debt in an uneven credit environment. With the domestic economy stabilizing, the Company’s prospects for better financial results during 2010 are
improving. Going forward, the Company needs to get the inventory investment right to drive growth in revenue and EBITDA so that total leverage eases back in
line with historical experience.
31
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Verso Paper
Free cash
flow
Operating performance
EBITDA EBITDA capex /
margin
interest
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Quarterly EBITDA
A/R
days
Inv.
days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
EBITDA
LTM 12/31/08
1,766,813
17.2%
196,440
11.1%
0.92
(30,423)
345,671
1,357,671
1.76
6.91
178,542
34.0%
46.9
24.3
138.7
29,565
31,900
LTM 3/31/09
1,599,980
15.2%
136,467
8.5%
0.47
(90,475)
345,000
1,347,886
2.53
9.88
77,893
31.1%
56.2
26.9
184.5
2,576
10,100
LTM 6/30/09
LTM 9/30/09
1,446,493
1,355,733
11.6%
9.2%
96,680
6.7%
4.2%
0.28
0.05
(39,332)
40,998
410,129
345,040
1,365,694
1,248,435
4.24
6.02
14.13
21.78
183,134
199,199
32.4%
32.9%
45.0
39.7
14.8
14.4
139.7
131.9
(15,440)
40,617
N/A
N/A
57,318
FCF
Leverage
Verso Paper Corp. manufactures coated ground wood paper, coated freesheet paper, supercalendered paper, and kraft pulp. The company’s products are
used in catalogs, magazines and high-end advertising brochures. Revenue from the sale of coated ground wood and coated freesheet paper represented 53%
and 31% of revenue, respectively, and a combined 79% of tons sold during the year ended December 31, 2008. The catalog channel represents the
predominant use of company’s products, and no single client represented more than 10% of revenue (2008). The company operates 11 paper machines in four
mills located in the US. Apollo Management, L.P. acquired the company from International Paper during August 2006 and completed an initial public offering
during May 2008. At September 30, 2009, Apollo was the largest shareholder controlling approximately 62% of the company’s common stock.
Strengths
• Industry leader in the manufacture of coated groundwood paper in North America with 1,693 million tons of annual production capacity
• Entrenched client relationships with publishers of magazines and catalogs as well as distributors to the print trade ensure participation in recovery in any
uptick in media and advertising spending
• Catalog publications are considered important to the multi-channel marketing strategy for retail clients
• Broad product offering from ultra light weight coated ground wood to heavyweight coated freesheet and supercalendered papers
• Strong liquidity in the aggregate amount of $199 million includes cash of $93 million and revolving loan availability of $106 million
Weaknesses
• Highly leveraged condition due to declining EBITDA from cyclically weak paper demand and debt related to the 2006 acquisition by Apollo
• Technology risk for magazine channel clients as consumers may shift toward the Internet as primary news and information source
• Revenue is correlated to general economic conditions and spending in the media and advertising industry
• Capital intensive business model and high operating leverage
• Margins are susceptible to volatile production inputs for chemicals, wood, and energy
• Highly competitive and highly regulated industry in terms of safety and environmental compliance
Summary:
Verso Paper’s dependence upon the sale of coated ground wood and coated freesheet for catalogs and magazines makes it susceptible to the industry’s
inherent supply demand imbalances and the cyclicality of media and advertising industry. A strengthening economy, increasing employment, and improving
consumer confidence should bode well for advertising and media spending that is expected to gradually improve during 2010. In the near term, however, and
to confront the possibility that paper demand does not materialize, the company needs to maintain management discipline until such time that external
conditions improve in order to drive leverage lower.
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
32
Xerium Technologies
Free cash
flow
Operating performance
Sales
GPM
EBITDA
EBITDA EBITDA capex /
margin
interest
FCF
Leverage
Other
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Quarterly EBITDA
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
638,139
45.4%
128,573
20.1%
1.48
38,040
606,200
616,957
4.71
4.80
80,633
41.1%
58
102
52
16,714
24,551
LTM 3/31/09
595,655
45.1%
117,458
19.7%
1.63
5,544
600,000
609,336
5.11
5.19
47,498
38.2%
66
123
64
21,530
20,169
LTM 6/30/09
LTM 9/30/09
546,105
517,106
44.6%
46.1%
117,275
21.5%
17.5%
1.33
1.01
(719)
4,170
609,400
619,500
618,752
628,554
5.20
6.85
5.28
6.95
42,196
43,615
38.8%
38.8%
57
55
118
107
45
37
29,443
22,758
31,600
25,096
90,445
Xerium Technologies, Inc. is a manufacturer of industrial textiles commonly known as paper machine clothing and roll covers used in the production of paper.
Clothing products (65% of 2008 revenue) are highly engineered synthetic textile belts that transport paper as it is formed, pressed, and dried while moving
through paper-making machines. Roll cover products (35% of 2008 revenue) coat the machines’ large steel cylinders between which the paper travels during
processing. Both products are consumable and remain in constant contact with the paper stock during processing and contribute to the quality of the final
paper product as well as the overall efficiency of the production process. Xerium has 34 facilities in 14 countries. No individual client represented more than
5% of revenue during 2008 while the 10 largest clients represented 24%.
Strengths
• Products are consumable, highly engineered and tailored to the clients’ paper making processes with a direct impact on the characteristics of the finished
paper product
• Entrenched client relationships with leading manufacturers of paper
• Established global distribution network/repair facilities with 34 facilities in 14 countries
Weaknesses
• Company is operating pursuant to a waiver agreement with the lenders that terminates February 1, 2010
• Company is highly leveraged due to slowing revenue driven by lower paper demand that lengthened the replacement cycle resulting in deteriorating EBITDA
• End markets are highly cyclical and recent global recession resulted in curtailments, and idling of paper making machines that drove lower paper production
across all grades, especially newsprint and packaging
• Availability of credit for the Company and its clients could impact the Company and its client base
Summary
In response to its weakened financial condition, the Company again retained AlixPartners, LLC as financial advisor. Xerium’s clothing and roll cover products
are consumable and essential to the paper production process. With a long history of experience, technological prowess, and facilities located in all major
markets, the Company should be positioned to participate in the industry going forward. At the current time, however, end markets are cyclically weak, and
paper producers continue to rationalize output in line with anticipated lower demand
33
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Retailers & Distributors
Retailers start 2010 better positioned then they did in 2009. The retail environment was
grim early in 2009 as rising unemployment and declining consumer confidence saw many
retailers post significant declines in same store sales. However, as the year went on and
the economy stabilized retailers performed better. Many still posted declining same store
sales but the rate of decline was beginning to moderate. Also, retailers, like most firms in
2009, reduced expenses and right-sized inventory which also helped them to weather the
storm. The key factors to look for in 2010 are unemployment trends, inventory metrics
and consumer confidence. Most of the firms LCD covers offer specialty merchandise that
are not necessarily consumer staples and thereby require solid consumer confidence to
justify discretionary purchases. With the exception of Burlington Coat, leverage and
cashflow are also areas of concern for the credits noted below.
Companies covered include:
•
•
•
•
•
•
Burlington Coat Factory
Claire’s Stores
Keystone Automotive
Michaels Stores
Neiman Marcus
Rite-Aid
34
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Burlington Coat Factory
Free cash
flow
Operating performance
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
Quarterly EBITDA
(AR 80%+Inv
60%+PPE
A/P
33%)/Total Debt Inv. days days
LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 2/28/09
3,540,651
39.0%
261,048
7.4%
1.25
71,787
908,107
1,336,592
3.48
5.12
455,344
57%
117.4
72.6
132,344
136,469
LTM 5/30/09
3,571,367
38.4%
261,014
7.3%
1.42
42,339
1,021,057
1,449,546
3.91
5.55
261,110
48%
117.7
54.9
17,366
33,591
LTM 8/29/09
LTM 11/28/09
3,569,490
3,533,151
38.4%
38.5%
265,047
267,403
7.4%
7.6%
1.89
2.22
223,106
204,522
884,352
864,752
1,312,847
1,292,161
3.34
3.23
4.95
4.83
432,874
655,958
57%
64%
140.1
121.3
69.8
80.7
12,519
105,174
18,005
111,509
Burlington Coat Factory (BCF) operates 442 stores in 44 states primarily under the Burlington Coat Factory Warehouse name. BCF offers customers a full line
of value-priced apparel, including ladies sportswear, menswear, coats, family footwear, baby furniture and accessories, as well as home décor and gifts. BCF’s
selection provides a wide range of apparel, accessories and furnishing for all ages.
Strengths
• Solid Brand name
• Geographic diversity
• Value Priced merchandise
• Cost reduction plan has stabilized EBITDA and margins
• Good Liquidity
Weaknesses
• Q2 2010 same store sales declined 5.2%/Dependent on consumer spending
• Minimal historical free cashflow versus over $1.3B in debt but recent trends are improving
• Substantial capex for store maintenance and expansion
• Competition
Summary:
BCF appears to be relatively well positioned to weather the downturn in the economy. The Company’s brand name, value-priced merchandise, and focus on
reducing costs are the Company’s key strengths. The Company, however, is still faced with declining same store sales.
35
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Claire’s Stores
Free cash
flow
Operating performance
Other
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Sales
GPM
LCD EBITDA
LTM 1/31/09
1,412,960
49%
187,002
13%
0.65
(58,032)
1,622,250
2,581,772
8.68
13.81
204,574
6%
47
24
1/0/1900
73,636
76,390
LTM 4/30/09
1,379,055
49%
196,717
14%
0.77
(35,611)
1,618,625
2,587,696
8.23
13.15
206,703
6%
60
35
4/30/2009
36,576
36,250
LTM 8/1/09
LTM 10/31/09
1,333,278
49%
194,736
15%
0.83
(24,650)
1,615,000
2,566,260
8.29
13.18
182,350
6%
62
31
8/1/2009
48,433
50,496
1,324,711
50%
208,700
16%
0.97
9,733
1,610,000
2,528,981
7.71
12.12
165,159
4%
79
38
10/31/2009
50,055
53,700
EBITDA
FCF
Senior debt
Total debt
Senior
debt to Total debt
EBITDA to EBITDA
Quarterly EBITDA
Company
adjusted
EBITDA
EBITDA
margin
EBITDA capex /
interest
Leverage
Total
Liquidity
Inv.
days
A/P
days
Claire’s Stores is a specialty retailer offering value-priced, fashion accessories and jewelry for kids, teens, and young women in the 3 to 27 age range. As of
Oct 31, 2009, Claire’s operated a total of 2,954 stores, of which 2,001 were located in the US and Canada, and 953 stores were located in the United Kingdom,
France, Switzerland, and other countries in Europe. In addition, the company franchised 192 stores in the Middle East and operated 215 stores in Japan
through Claire's Nippon joint venture. The company’s stores operate under the trade names “Claire’s” and “Icing.”
Strengths
• Strong Brand Name
• Product assortment/solid merchandising given increasing transaction values
• Value Pricing
• Margins are improving due to better merchandise margins and lower SG&A
• Liquidity: The company has over $165.2 million in cash on its balance sheet
• Manageable capex despite over 2,900 company owned stores
Weaknesses
• Same store sales are still flat to down
• Leverage: As a result of the decline in EBITDA, the company is highly levered at 12x
• Minimal historical cashflow versus $2.5 billion in debt: Over the past three years, the company has generated a minimal amount of cashflow versus almost
$2.5B in debt. However, the key point here is that even with $250 million in EBITDA (versus $207 million for the LTM period ended Oct 2009), cashflow
would only be approx $70 million assuming: 1) $150 million in interest, 2) $25 million in Capex and 3) $5 million Cash Taxes
• Fashion related merchandise
• Decrease in mall traffic
• Capital structure: The loans are covenant-lite, pricing is L+275 and all of the debt is USD denominated. The company operates 946 stores in Europe
Summary:
The company’s is faced with several challenges going forward including leverage, cashflow and same store sales growth. However, the company’s brand
name, customer base, merchandising and cost reduction strategies are the factors that will position the company for growth in the future.
36
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Keystone Automotive Operations
Free cash
flow
Operating performance
Sales
GPM
EBITDA EBITDA capex /
EBITDA margin
interest
FCF
Leverage
Other
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
A/P
days Inv. days days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
566,281
31.2%
32,373
5.7%
0.78
(2,459)
218,481
393,507
6.75
12.16
65,967
29%
36.2
126.5
34.2
(792)
N/A
LTM 3/31/09
542,121
31.3%
27,238
5.0%
0.70
23,255
218,000
393,015
8.00
14.43
96,258
29%
32.3
118.8
40.4
5,265
N/A
LTM 7/4/09
LTM 10/3/09
505,914
31.0%
19,390
3.8%
0.46
33,824
217,500
392,524
11.22
20.24
91,637
27%
29.6
100.2
46.9
7,754
N/A
486,270
30.9%
17,931
3.7%
0.43
36,061
217,000
392,032
12.10
21.86
96,901
26%
29.3
108.0
48.4
5,704
N/A
Keystone Automotive Operations is a distributor of specialty automotive equipment and accessories in North America. The company offers an assortment of
specialty products in the automotive aftermarket industry, including more than 250,000 items from over 600 suppliers. Examples of key products include grille
guards, cargo nets, off-road suspension kits, roof racks, custom exhaust systems and trailer hitches. The company has 20 locations serving over 17,000
customers in North America.
Strengths
• Geographic, product, supplier and customer diversity
• Company offers marketing and technical support to small aftermarket auto accessories manufacturers
• Strong market share/Limited competition, as major auto parts retailers do not stock a similar breadth and depth of products
• Minimal capex
• No near term maturities (2012)
• Liquidity: Some liquidity in terms of cash and R/C availability. Increase in cash occurred in Q1 2009 due to working capital as inventory levels flat to Q4
2008. CFO was flat in Q2 2009 but increased in Q3 2009
Weaknesses
• Auto accessories are a discretionary expenditure
• Company does not focus on parts such as brakes, tires, and maintenance items that are needed for the mechanical operation of a car or truck
• High leverage, minimal cash flow and declining EBITDA
• SUVs are a key segment for accessories, and sales in this segment are expected to decline as new car sales shift to smaller cars and crossovers
• Dependence on new car sales to drive the sale of accessories as some accessories are installed shortly after a vehicle is purchased
• Term Loan is covenant-lite
Summary
Keystone Automotive has a strong market share, product and geographic diversity and unlike typical distributors, offers value-added services. However, the
reduction in consumer discretionary spending weighs heavily on the firm because its products are generally deemed extras or add-ons that are tangential to the
mechanical operation of vehicles. Therefore, until the economy improves, the Company’s sales and EBITDA will be constrained.
37
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Michaels Stores
Free cash flow
Operating performance
EBITDA capex /
interest
Leverage
Other
Quarterly EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Inv.
days
A/P
days
Sales
GPM
EBITDA
EBITDA
margin
LCD EBITDA
Company
adjusted
EBITDA
LTM 11/1/08
3,833,706
38%
505,557
13%
1.31
101,730
2,710,000
4,183,000
5.36
8.27
602,000
19%
167
42
103,000
112,000
LTM 1/31/09
3,817,000
36%
439,000
12%
1.17
(26,000)
2,445,000
3,929,000
5.57
8.95
627,000
17%
100
26
190,000
207,000
LTM 5/2/09
3,822,000
36%
454,000
12%
1.32
69,000
2,464,000
3,957,000
5.43
8.72
571,000
17%
149
36
98,000
107,000
LTM 8/1/09
3,833,000
36%
472,000
12%
1.50
124,000
2,459,000
3,964,000
5.21
8.40
562,000
17%
164
37
81,000
85,000
FCF
Senior debt
Total debt
Senior debt Total debt to
to EBITDA
EBITDA
Michaels Stores, Inc, is the largest arts and crafts specialty retailer in North America providing materials, ideas and education for creative activities. Michaels
Stores, Inc. operates approx. 1,023 Michaels retail stores in 49 states, as well as in Canada, averaging 18,300 square feet of selling space per store. The
stores offer arts and crafts supplies and products for the crafter and do- it yourself home decorator. The Company also operated 155 Aaron Brothers stores in 9
states, averaging 5,500 square feet of selling space per store, offering photo frames, custom framing services, and a wide selection of art supplies.
The Company’s typical customer is:
• Female - 90% are women and 63% are married
• Young- 71% of customers are under 55, with 46% of them between the ages of 35 and 54
• Middle class- 64% of customers have household incomes greater than $50,000, with a median income of about $65,000
• Loyal - Most customers shop for craft supplies at least twice a month, with approximately half of their visits to Michaels
Strengths
• Strong Brand Name/ Loyal customer base
• Value Pricing
• Flat same store sales despite the recession
• Stable margins
• Liquidity: The Company has over $500 million in liquidity
Weaknesses
• Leverage: Company is highly levered at over 8x
• Minimal Historical cashflow versus $4 billion in debt
• Competition
Summary:
Michaels Stores has performed relatively well despite the economy. The key point to take away here is that even in a bad recession, the company’s core
customer is loyal and will continue to buy products. The company does face several challenges ahead if it is to reduce debt and leverage for the next several
quarters, but sales and EBITDA should be relatively stable, with some upside over that timeframe.
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
38
Neiman Marcus
Free cash
flow
Operating performance
EBITDA EBITDA capex /
margin
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
Quarterly EBITDA
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Inv. days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
EBITDA
LTM 1/31/09
4,159,604
33%
450,904
11%
1.24
(9,503)
1,625,000
2,946,199
3.60
6.53
799,384
29%
105
24
24,583
24,600
LTM 4/30/09
3,907,529
32%
354,181
9%
0.94
25,121
1,625,000
2,963,311
4.59
8.37
739,388
29%
149
31
105,300
105,300
LTM 8/1/09
3,643,346
30%
273,811
8%
0.73
109,288
1,625,000
2,980,838
5.93
10.89
791,925
26%
125
30
5,712
5,700
LTM 10/31/09
3,526,459
30%
264,540
8%
0.76
255,182
1,598,383
2,972,173
6.04
11.24
826,615
28%
136
40
128,945
5,700
Neiman Marcus is a retailer of luxury goods. The company was founded in the early 1900s and currently operates 41 Neiman Marcus full- line stores at prime
retail locations in major U.S. markets and two Bergdorf Goodman stores on Fifth Avenue in New York City. The company also operates catalogs and ecommerce websites under the brands Neiman Marcus, Bergdorf Goodman and Horchow and 28 clearance centers.
Strengths
• Strong Customer Base: The company has a strong customer base of affluent consumers that are attracted to the company’s designer merchandise and
strong customer service
• Strong Brand Name: The Neiman Marcus and Bergdorf Goodman brand names are well known in the luxury goods marketplace
• Relationship with Designers: The company has strong relationships with designers that ensures that it will receive the right merchandise at the right time
• Liquidity: The company has strong cash balances and over $500 million in revolver availability
• Margins: company has had some success in improving margins and reducing costs
Weaknesses
• First quarter 2010 financial results were weak versus 2009 and significantly below 2008 (EBITDA 38% below 2008)
• Leverage: As a result of the substantial decline in EBITDA, the company is highly levered at 11x
• Minimal Historical cashflow versus $3 billion in debt
• Merchandise strategy: While expanding mid-priced merchandise might increase customer traffic, the risk of this strategy is that it could diminish the brand
and alienate the core customer
• Competition: There are numerous competitors in this industry, such as Saks, Nordstrom, Bloomingdales and the retail stores of luxury goods designers. In
addition, as Neiman introduces mid-priced merchandise, there are additional competitors that include department stores and specialty chains
• Cyclicality / Decrease in “aspirational/incremental” customers as a result a downturn in the economy. Given 10% unemployment and deleveraging
households it may be difficult for aspirational customers to return in the near future
Summary:
The company had a difficult year and needs an uptick in the economy for EBITDA to meaningfully improve.
39
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Rite-Aid
Free cash flow
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 2/28/09
26,289,268 29.0%
636,493
2.4%
0.37
(104,413)
3,330,472
6,011,709
5.23
9.45
875,690
56%
69.7
23.9
168,690
261,381
LTM 5/30/09
26,207,590 28.9%
677,812
2.6%
0.69
467,742
3,026,651
5,691,324
4.47
8.40
1,038,264
58%
66.9
24.5
201,632
249,196
LTM 8/29/09
LTM 11/28/09
26,029,216 28.7%
25,912,898 28.6%
705,251
726,338
2.7%
2.8%
0.97
1.11
339,782
(85,683)
3,253,218
3,794,076
5,914,641
6,421,643
4.61
5.22
8.39
8.84
855,412
903,000
57%
59%
67.8
69.5
24.9
25.6
175,883
180,133
216,535
254,192
Rite Aid, Inc. is the third largest retail drug store chain in the United States. The Company operated 4,801 stores in 31 states and the District of Columbia as of
November 2009. The Company sells prescription drugs (67.2% of 2008 revenue) and a wide assortment of other merchandise, or front-end products including
over the counter medications (8.7% of 2008 revenue), health and beauty aids (5.3% of 2008 revenue), and other general merchandise (18.8% of 2008
revenue). Private label products represented 13.5% of front end sales during 2008. The Company acquired the Brooks Eckerd drugstore chain during June
2007 from The Jean Coutu Group (PJC) Inc.
Strengths
• Industry leader with established base of 4,801 stores in 31 states
• Strong market presence in densely populated regions, such as New York City, Los Angeles/Orange County, Philadelphia and San Diego
• Good liquidity with aggregate cash and unused revolving loan commitment of $1.06 billion at November 2009
Weaknesses
• Highly leveraged as a result of the 2007 acquisition of Brooks Eckerd
• Declining same store sales and inability to drive consistent growth
• Competitive industry with well capitalized participants including CVS Caremark Corporation, Walgreen Company, and Wal-Mart Stores, Inc.
• Pharmaceutical sales and reimbursement rates are extensively regulated at the federal and state levels. The final form of healthcare legislation currently
under discussion in Congress is not known
Summary:
Rite Aid remains highly leveraged from acquisition related obligations. With the integration of Brooks Eckerd in the past and despite the tough economy,
management needs to improve store merchandising and operations, drive dependable top-line growth, and steadily improve margins. The company also needs
to simultaneously increase front-end and prescription sales, and to drive margins closer to those of industry peers. Improving cash flow over time should result
in lower dependence on external debt and ultimately should lower leverage.
40
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Other
For those firms that LCD covers but do not necessarily fit in an industry or category
previously mentioned, please see the following pages for those issuers noted below:
• Alion
• Atlantic Broadband
• Dana
• Knology
• Mediacom
• Ply Gem
• Venoco
41
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Alion Science and Technology
Operating performance
Sales
GPM
EBITDA
EBITDA margin
EBITDA capex /
interest
Free cash flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
745,133
23.3%
48,467
6.5%
0.92
51,837
232,073
521,642
4.79
10.76
51,330
28%
81.7
33.6
16,370
N/A
LTM 3/31/09
751,319
23.1%
53,322
7.1%
1.12
40,879
236,645
528,090
4.44
9.90
41,980
29%
82.5
33.4
14,990
N/A
LTM 6/30/09
LTM 9/30/09
769,603
802,225
23.0%
23.3%
55,760
56,524
7.2%
7.0%
1.10
0.99
28,564
6,812
231,776
229,221
525,090
526,813
4.16
4.06
9.42
9.32
49,190
36,003
28%
28%
79.4
75.1
28.6
27.9
11,406
13,758
N/A
N/A
Alion Science and Technology Corporation, is a contractor to US government agencies providing scientific, engineering, and technology solutions primarily
related to national defense, and homeland security, as well as for energy and environmental issues. The largest client of the Company is the US Department
of Defense that represented 92% of 2009 revenue spread among approximately 700 separate contracts. At September 2009, Alion’s contractual backlog
approximated $6.4 billion with a historical contract renewal rate of 87% during the past three years. The US Navy is the largest individual client of the
Company representing 46% of 2009 revenue. Services to the Navy include (a) ship design and production support; (b) ship systems integration; (c) ship
systems design for propulsion, HVAC, electrical, etc.; (d) mission and threat analysis; as well as (e) business and financial management, to name a few. Alion
employs approximately 3,400 associates with 18% having Top Secret or higher security clearances. The Company is employee owned through an ESOP trust.
Strengths
• Contract backlog approximates $6.4 billion, or approximately 8 times annual revenue
• Strong contract renewal experience with historical renewal rate approximating 87% during the past three years
• Entrenched client relationship with the Department of Defense, especially the US Navy
• Among the larger contractors to the Department of Defense ranked by prime contracting revenue
Weaknesses
• Near term debt maturity as the revolving loan commitment matures during September 30, 2010
• Revenue is concentrated among seven contracts within the Department of Defense representing 52% of 2009 revenue
• Highly leveraged financial condition with substantial interest burden
• Revenue is contract driven and dependent upon annual appropriations by the US government
• Government contracting industry is highly competitive with many better capitalized participants
Summary:
Alion has a strong backlog, entrenched relationships with the Department of Defense and the Navy, strong contract renewal experience, is a key provider of
technical services to the Navy, and considered to be positioned to expand these relationships. The miscalculation of EBITDA and ensuing failure to comply with
the senior secured loan agreement during historical periods notwithstanding, the Company has demonstrated the ability to operate in a leveraged environment
in an industry characterized by contract revenue and annual government appropriations.
42
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Atlantic Broadband
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
280,986
54.0%
110,274
39.2%
1.47
10,531
457,800
614,849
4.15
5.58
84,090
12.1%
10.3
36.0
29,505
N/A
LTM 3/31/09
287,494
54.2%
113,882
39.6%
1.65
19,889
446,673
603,664
3.92
5.30
67,070
12.1%
10.3
34.5
29,959
N/A
LTM 6/30/09
LTM 9/30/09
293,363
297,870
54.4%
55.0%
117,918
122,288
40.2%
41.1%
1.92
2.15
37,113
48,573
442,600
441,500
599,570
598,393
3.75
3.61
5.08
4.89
77,963
89,709
12.0%
11.9%
9.4
9.4
31.4
30.6
30,748
32,076
N/A
N/A
Atlantic Broadband Finance, LLC, provides communications and entertainment (phone, Internet, and cable) services to both residential and business clients in
four domestic clusters located in central Pennsylvania; Miami Beach, Florida; Aiken, South Carolina; and the Maryland/Delaware region. The Company
considers itself the 15th largest cable provider in the US. The number of total homes passed has been steady over time at approximately 505,000 with
approximately 279,000 cable, 132,000 Internet, and 60,000 telephone subscribers at September 30, 2009. Revenue is derived from the collection of monthly
subscription fees that may be discontinued by the subscriber at any time. The Company paid aggregate dividends to members of $98 million during the period
from December 2006 through September 30, 2009. The largest shareholders of the Company were ABRY Partners and affiliates and Oak Hill that owned an
approximately 73.6%; and 14.8%, respectively, of the outstanding common stock of Atlantic Broadband at December 31, 2008.
Strengths
• Market clusters are smaller and generally mature with limited availability of the high-speed alternative Internet options marketed by competing firms
• Strong EBITDA margins consistently in the range of 38-40% since December 2007
• Cash from operations adequately covers all capital outlays
• Moderately leveraged operator with strong cash flow
Weaknesses
• Near term debt maturity with respect to $40 million of the $67.5 million revolving loan commitment terminating on March 1, 2010
• Smaller provider in a highly competitive industry with better capitalized competitors
• Technology risk from Internet delivery of programming may result in subscriber attrition
• Smaller subscriber base limits the ability to negotiate lower rates for programming and other operating expenses
• Incumbent providers are expanding services to include bundled service offerings across the voice, Internet, and video spectrum
• Extensively regulated at the federal, state, and municipal levels
Summary:
The Company generates solid cash flow from the disparate market clusters that was recently amplified by capital spending restraint and the cessation of
dividends to members. Industry wide competition appears to be heating up and the management team will be facing increasing programming costs and
necessary higher capital spending going forward with a smaller revolving loan commitment. The management team is experienced in operating in a leveraged
environment and is expected to perform well in the face of market and industry challenges..
43
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Dana
Free cash flow
Operating performance
EBITDA capex /
interest
Leverage
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
A/R
days
Inv.
days
A/P
days
Company
adjusted
EBITDA
GPM
EBITDA
EBITDA
margin
LTM 12/31/08
8,095,000 7.9%
157,000
1.94%
(0.62)
(1,287,000)
1,251,000
1,251,000
7.97
7.97
822,800
145%
60.1
58.9
57.9
(58,000)
10,000
LTM 3/31/09
LTM 6/30/09
LTM 9/30/09
6,999,000 7.0%
1,000
0.01%
(1.56)
(402,000)
1,179,000
1,228,000
-
-
583,900
137%
60.4
66.1
56.8
(49,000)
16,000
5,856,000 7.5%
(8,000) -0.14%
(1.45)
(342,000)
1,065,000
1,099,000
-
-
558,400
149%
60.2
64.7
51.9
73,000
94,000
5,256,000 9.3%
62,000
(0.65)
(36,000)
991,000
1,021,000
15.98
16.47
920,000
159%
53.8
54.4
47.7
96,000
101,000
Sales
1.18%
FCF
Senior debt
Total debt
Senior debt Total debt to
to EBITDA
EBITDA
Quarterly EBITDA
LCD EBITDA
Dana Holding Corporation manufacturers OEM and aftermarket parts for global manufacturers of automobiles, commercial vehicles, and off-highway
equipment. The Company’s product offering includes: (a) automotive (57% of 2008 revenue) – light axles, driveshafts, structural products, sealing products,
thermal products, and aftermarket products for light trucks, sport utility vehicles, crossover vehicles and passenger cars; (b) commercial (22% of 2008 revenue)
– axles, driveshafts, chassis and suspension modules, ride controls and systems, sealing products, and thermal products, and aftermarket products for medium
and heavy-duty trucks, buses, and other commercial vehicles; (c) off-highway (21% of 2008 revenue) – axles, transaxles, driveshafts, suspension components,
transmissions, electronic controls, sealing products, thermal products, and aftermarket products for construction machinery, RVs, agricultural, mining, forestry,
and material handling equipment. During 2008, product revenue was generated in North America (48%), Europe (30%), South America (14%), and Asia (8%).
The 10 largest clients during 2008 represented approximately 52% of revenue with Ford being the largest single client representing 18% of 2008 revenue. No
other client represented more than 6% of 2008 revenue. The Company has 113 facilities in 26 countries and employed 22,500 associates at June 2009.
Strengths
• Company established as a strategic partner to the entrenched client base. Ford’s improved performance should benefit the company
• High switching costs as components are typically specified into platform for the life of the vehicle
• Industry leader with world wide manufacturing and distribution capability
• Company expects to be in compliance with financial covenants governing loan agreements through the third quarter of September 2010
• Post emergent debt level is manageable at current levels of adjusted EBITDA
Weaknesses
• Global economic conditions weigh on final demand for automotive, commercial, and off-highway products produced by immediate clients
• Reliance upon cyclically weak automobile manufacturers that represented 57% of 2008 revenue
• Extensively regulated industry at the federal level with CAFÉ standards yet to be finalized
• The inability to recover commodity costs
Summary:
The Company has performed well with strong liquidity, anticipated loan compliance through the third quarter of September 2010, and has manageable leverage
based on the expense reduction plans subsequent to emerging from bankruptcy in January 2008.
44
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Knology
Operating performance
Sales
GPM
EBITDA
EBITDA
margin
EBITDA capex /
interest
Free cash flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days
A/P days LCD EBITDA
Company
adjusted
EBITDA
LTM 12/31/08
410,230 69.9%
130,203
31.7%
1.77
33,628
606,836
611,683
4.66
4.70
103,262
25%
28.09
71.29
33,508
35,248
LTM 3/31/09
413,576 69.8%
131,505
31.8%
1.89
39,234
600,000
600,873
4.56
4.57
75,648
25%
27.63
69.13
33,658
35,252
LTM 6/30/09
LTM 9/30/09
419,385 69.4%
421,971 69.3%
135,259
133,203
32.3%
31.6%
2.03
2.02
47,589
49,027
595,000
594,686
599,256
601,384
4.40
4.46
4.43
4.51
89,900
97,604
24%
24%
26.50
28.04
67.79
75.44
35,119
30,918
36,967
35,964
Knology, Inc. provides interactive communications and entertainment (phone, Internet, and cable) services to both residential and business clients. Service is
provided via the Company’s wholly-owned and fully-upgraded minimum 750 MHz interactive broadband network. The Company provides a full suite of video,
voice and data (triple play) services in 10 markets in the Southeastern United States, and two markets in the Midwestern United States.
Strengths
• Cash from operations adequately covers all capital outlays
• No near term debt maturities as lenders recently agreed to extend the maturity of senior secured term loans from June 30, 2012 to June 30, 2014
• Strong operating margins with quarterly EBITDA consistently in the range of 29% to 32% since March 2008
• Integration of PCL Cable expected to be well within capabilities of the Company
• Moderately leveraged operator with strong cash flow and ample cash reserves
Weaknesses
• Smaller provider in a highly competitive industry with better capitalized competitors
• Smaller subscriber base limits ability to negotiate lower rates paid for programming and other operating costs
• Incumbent providers are expanding services to include bundled service offerings across the voice, internet, and video spectrum
• Reliance upon access to competitors’ telephone networks to provide local telephone service
• Extensively regulated at the federal, state, and local level
Summary:
The Company continues to reward investors with consistent revenue growth, improving cash flow, and strong EBITDA margins that combined with scheduled
principal payments serve to steadily reduce leverage and business risk. The integration of PCL Cable is expected to be seamlessly completed as this is the
smallest acquisition since 2007.
45
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Mediacom
Free cash
flow
Operating performance
EBITDA
EBITDA
margin
EBITDA capex /
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total Debt
Quarterly EBITDA
A/R
days A/P days LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 12/31/08
1,401,894
58.2%
506,766
36.1%
1.02
(21,110)
2,191,000
3,316,000
4.32
6.54
829,311
16.6%
20.4
1.9
128,373
129,600
LTM 3/31/09
1,422,653
58.0%
515,645
36.2%
1.13
21,048
2,275,000
3,400,000
4.41
6.59
698,545
16.2%
20.0
1.0
133,339
135,100
LTM 6/30/09
LTM 9/30/09
1,437,647
1,448,477
57.8%
57.6%
521,674
526,191
36.3%
36.3%
1.26
1.41
38,493
86,323
2,245,000
2,525,000
3,370,000
3,375,000
4.30
4.80
6.46
6.41
680,074
654,042
16.5%
16.4%
20.7
21.5
4.3
6.4
135,002
129,477
136,800
131,300
Mediacom Communications Corporation provides communications and entertainment (phone, Internet, and cable) services to both residential and business
clients in smaller cities and towns predominantly in the Midwestern and Southern regions of the United States. The Company considers itself the 7th largest
cable provider in the US with 2.79 million homes passed in 22 states. At September 2009, Mediacom served 1.26 million basic subscribers, 765 thousand HSD
customers, 665 thousand digital clients, and 274 thousand telephony customers. Revenue is derived from the collection of monthly subscription fees that may
be discontinued by the subscriber at any time.
Strengths:
• Strong EBITDA margins consistently in the range of 35 – 37% since December 2007
• No near term debt maturities except for negotiated step downs of the revolving loan commitment and the Broadband term loan A on March 31, 2010
• Cash from operations adequately covers capital outlays
• Leveraged operator with strong cash flow and adequate liquidity primarily in the form of unused revolvers of $584 million at September 2009
Weaknesses:
• Operating margins may be under increasing pressure from increasing programming costs, competition, and limited ability to raise the price of service in the
face of 10% unemployment and a slow growth economy
• Highly competitive industry with larger and better capitalized participants
• Incumbent providers are expanding services to include bundled service offerings across the voice, Internet, and video spectrum
• Technology risk from Internet delivery of programming may result in subscriber attrition
• Extensively regulated at the federal, state, and municipal levels
Although more highly leveraged than some industry comparables, Mediacom has good liquidity, strong cash flow, and has rewarded investors with EBITDA
margins consistently in the 35% range since 2007. The challenges facing the Company appear to be contained to increasing programming costs and
heightened competition for subscribers in a sluggish economy with high unemployment.
46
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Ply Gem
Free cash flow
Operating performance
EBITDA EBITDA capex /
EBITDA margin
interest
FCF
Leverage
Senior debt
Total debt
Other
Senior debt Total debt to
to EBITDA
EBITDA
Total
Liquidity
(AR 80%+Inv
60%+PPE
33%)/Total
Debt
Quarterly EBITDA
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
Sales
GPM
LTM 12/31/08
1,175,019
17.2%
81,648
6.9%
0.47
(75,434)
754,040
1,114,186
9.24
13.65
111,089
18.2%
49.6
56.3
37.6
4,307
5,739
LTM 3/31/09
1,101,397
16.7%
60,994
5.5%
0.31
(65,922)
764,297
1,124,433
12.53
18.44
61,015
18.0%
48.5
60.9
28.6
(18,912)
(13,337)
LTM 6/30/09
LTM 9/30/09
1,020,693
971,337
17.2%
19.1%
61,480
74,573
6.0%
7.7%
0.37
0.50
(62,171)
8,403
774,555
759,828
1,134,681
885,236
12.60
10.19
18.46
11.87
72,182
116,267
19.1%
25.5%
41.9
43.8
45.5
39.3
24.8
27.6
36,013
53,165
41,513
57,597
Ply Gem is a manufacturer of residential exterior building products in North America. The Company offers a comprehensive product line of vinyl siding, vinyl
windows and doors, and vinyl and composite fencing that serves both the home repair and remodeling and new home construction sectors in the United States
and Western Canada. The Company believes that its vinyl building products have the leading share of sales by volume in siding and windows. For the first nine
months of 2009, the siding segment represented 60% of sales and the window and door segment approx 40%. Ply Gem was acquired by CI Capital in 2004.
Strengths:
• Increasing Market Share/outperforming the industry/Solid Brand name/Geographic diversity in the US
• Improving EBITDA/Margins due to facility closures and lower SG&A
• Liquidity: The company had over $116 million in cash and revolver availability as of October 3, 2009
• Manageable capex
Weaknesses:
• Cyclical business/Dependence on housing starts and remodeling activity
• Leverage remains high at over 7.9x and sales and units are still down versus the previous year
• Weak cashflow trends versus over $875 million in proforma debt: The key point is that even with $115 million in EBITDA, free cash is minimal assuming: 1)
$100 million in interest, 2) $10 million in Capex and 3) $5 million Cash Taxes
• Competition with numerous national and regional manufacturers of siding and windows
Summary:
The company’s recent actions to reduce debt and right-size its cost structure have clearly been positives. However, the Company still operates in a difficult
sector and leverage is high.
47
Copyright© 2010 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Venoco
Operating performance
Sales
GPM
LTM 12/31/08
559,520 72.2%
LTM 3/31/09
480,878 68.8%
LTM 6/30/09
LTM 9/30/09
375,645 62.3%
286,635 55.8%
EBITDA capex /
interest
Free cash
flow
Leverage
FCF
Senior debt Total debt to
Senior debt Total debt to EBITDA
EBITDA
Other
(AR 80%+Inv
60%+PPE
33%)/Total Debt
A/R
days
Inv.
days
A/P
days
LCD EBITDA
Company
adjusted
EBITDA
EBITDA
EBITDA
margin
360,957
64.5%
0.52
(120,482)
635,052
800,268
1.76
2.22
119,291
34.0%
47
24
139
40,164
68,676
288,917
60.1%
(0.57)
(123,144)
500,105
664,715
1.73
2.30
127,620
31.1%
56
27
184
22,546
53,147
195,507
52.0%
42.6%
(2.39)
(3.14)
(156,664)
(131,495)
544,874
539,485
694,532
689,178
2.79
4.42
3.55
5.65
68,684
66,073
32.4%
32.9%
45
40
15
14
140
132
27,952
31,377
44,076
48,000
122,039
Total
Liquidity
Quarterly EBITDA
Venoco, Inc. is an independent energy company engaged in the acquisition, exploitation, and development of oil and natural gas properties in California and
Texas. The Company’s principal properties are located both onshore and offshore in California’s Sacramento Basin, and onshore along the Gulf Coast of
Texas. Total proven reserves for oil and natural gas at December 31, 2008 were 50.5 MMbbls and 235.7 Bcf, respectively, as adjusted for the sale of Hastings
during February 2009.
Strengths:
• No near term debt maturities as newly issued Senior Notes are due in 2017 and the maturity of the second-lien term loan is 2014. The revolving loan
commitment needs to be refinanced during 2011
• Extensive use of derivative contracts to mitigate oil and natural gas price volatility and stabilize cash flows
• Reported reserves of 94.3 MMBOE and a potential production horizon of 12 years
• Institutional expertise in extracting oil and gas from the Monterey shale formation in the California region
• Lease extensions at the existing South Ellwood field would double the size of the existing field that could be serviced from the existing platform
Weaknesses:
• Extensively regulated and highly competitive industry with better capitalized competitors
• Geographic concentration in California
• Potential limitation on hedging activities under consideration by the CFTC may limit ability to mitigate volatile commodity prices
• Dependent upon external funding to finance exploration and development activities
• Continuing low prices for oil and gas could lead to further reductions in borrowing base availability
Summary:
Importantly, the Company priced a debt offering on October 2, 2009 that triggered the automatic two-year extension of Venoco’s second-lien term loan. The
Company reaffirmed 2009 guidance in investor presentation dated October 5, 2009.
48
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